The investment industry attracts two different types of investors basis their style of investing. A smart investor always goes for a combination of investment avenues which provides cushion from the risks and reaps greater benefits with long-term investment. Investing in different types of stocks also ensure you can opt for dividends at different intervals for maintaining cash flow.
The two different styles of investing
There are broadly two styles of investing: Growth and Value Investing. Both the styles target Capital Generation maximizing investment value for investors.
- Value investing refers to stocks of those companies which are undervalued in the market. Their stocks prices are generally less than their actual worth and potential.
- Only the investors who time watch the markets and constantly keep tracking the performance of various companies go for value investments.
- The performance analysis of such companies is done by comparing the intrinsic value to the current market value. A lot of factors determine and influence the intrinsic value of these companies. They may be financial statements, account books, management and composition, business model and strategy and its competitors in the market.
- By a general rule of thumb, it is said that if a company ranks lower on the current value than its intrinsic value, it holds high potential.
- Value investing stocks are best suited for long-term investments and are less risky.
- The stock price of value stocks is generally kept lower than normal stocks of the same category.
- A good intrinsic value depicts that the company will stand during the low times of market and plunging economies.
- As per the past performance, value stocks perform better during the early recovery period of economies, later on, they fall.
- Those companies which have shown above-average returns in the past years and are seemingly sustainable in the long-run are growth investing stocks. These estimates are based on markets corrections and other supporting pieces of evidence.
- Growth stocks or growth companies are not backed by long past history but have consistently shown growing potential for higher earnings. Although they are more volatile and sometimes even show price drop they are believed to be promising stocks.
- Even if the markets are falling, growth stocks have shown promising returns. They become much more rewarding when during these times other stocks of companies are on a fall.
- Since growth stocks are believed to be growing even if the economies are adverse, investors do not hesitate to buy them at higher prices compared to other stocks in the hopes of selling them at higher rates.
Value investing vs Growth investing
- Both the investment avenues have their respective benefits. Most of the investors use a mixture of stocks to make the maximum out of fluctuating economic cycles in both value and growth stocks. Moreover, since value stocks offer high returns with low risk, they have become quite common amongst the investors.
- Both the instruments offer smooth and promising returns in the long-run.
Which one to choose?
The answer to this question is dependent upon what do you seek to form these stocks? If you are not a risk-averse investor then growth stocks will not disappoint you. If you are looking for funds which will perform consistently over the years and provide with considerable returns, value stock is your thing.