To understand the difference between growth and value stocks, one needs to know their definitions to differentiate. To tell you the truth, no cut and dry definition exists for both the terms. Hence it is the question of understanding what growth is and how value of a stock is evaluated. Let me try to explain their natures in detail.
When the value of a stock is expected to increase, it can be termed as the growth stock. They are of upcoming companies and may not pay dividends. The company is on the move, the share is showing prospectus of growing and exhibits the competitive advantage with strong possibilities of long term price increase. These are the stocks of companies with future potential. You know what they are doing now, but don’t buy on account that, but for what they intend to do in future.
One invests in these shares envisaging rapid growth of the company along with that of the stock. The expectations are high. One sees the potential in the company, after studying the outcome of prescribed analysis. This along, the risk too is high. In the categories of small companies, the expected return is about 10% and for larger companies it is 7%. The point to be noted is the bear market destroys the value of such stocks.
Value stocks are selling for less than their actual worth. They generally are of well established companies, which pay dividends. The market is not fair to this stock, and it is quoted below its intrinsic worth. Recall Warren Buffet style of investing, in which he is inclined to spot the undervalued share, (which is also known as value investing) before others react to the situation. One who judges the position of the share early and dares to get in, stands to get maximum profits.
Value stocks may not be always cheap. But they are relatively cheap considering their existing and future potential. They, therefore, are considered as good deals. The stocks belong to companies that have a solid base and show steady progress. They have the latent capacity to survive the bear market, as their fundamentals are strong. Losses may occur, but they are sustainable, unlike growth stocks, where the losses are heavy. You can expect steady profits, and not windfalls. An intelligent strategy to buy the value stock is to go by the average of last 52 weeks and try to get the stock at that level. With this the prospectus of one making profits down the road are good.
Diversification is essential for an investor to succeed. Diversification is an all-comprehensive term. It means establishing the balance in different types of investments and also investments in different companies belonging to varied sectors. A good portfolio consists of both growth and value stocks. Review your portfolio at periodical intervals and do not develop attachment for a particular share, as attachment is not a good business trait.
The best of the advice also may land you in loss, as risks and investments go hand in hand. Broadly speaking, growth stock strategy is the one based on technical analysis and the value stocks on fundamental analysis. Both these are not watertight compartments. Do appropriate to the time of investments, depending upon the mood of the market at that particular time
Nothing is permanent in the market, except your interests!