A growth stock is a share that is expected to grow at a rate that is faster than the S&P 500. These stocks usually don’t pay dividends, because the companies want to reinvest any earnings received to grow at a rapid rate in the short term. Emerging growth companies are those that have the potential to achieve high earnings growth, but have not established a history of strong earnings growth. Because growth stocks tend to be a bit volatile they are considered to have some risk. Today growth stocks compose of a range of sectors like biotech companies tech companies and consumer discretionary companies. From my experience in growth stocks, I have owned two biotech stocks that have brought me great gains. One of them I made a 90% return on and sold due to high volatility. One week later I saw the stock pop another 80% in a single day!! just shows how volatile growth stocks are. I also own another biotech stock that I am up over 30% on which I’m holding till I feel the time is right to sell.
Key characteristics of growth stocks
- A large expanding market opportunity
- Tends to be more volatile than the broader market
- Growth stocks are often considered a riskier investment.
- Great corporate culture
A value stock is an investment strategy that involves investing in stocks that appear to be underpriced and trading under intrinsic value. Value investors look for stocks that they think wall street is underestimating. They believe that the market overreacts to good and bad news, resulting in stock price movements that do not correspond to companies’ long term goals and fundamentals. The overreaction from the market is a great buying opportunity to purchase a solid company at a fair to a great price. From my experience with value stocks during the correction of 2018, I had purchased stock in Microsoft and Proctor and gamble. These companies have little to no debt and were on sale at the time. I am up over 40% on both companies while receiving a steady dividend. These are two great companies that I plan to hold forever and one of them is pretty much recession-proof.
Key characteristics of Value Stocks
- High dividend yield
- low P/E ratio (company’s share price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are over or undervalued)
- Typically priced lower than stock prices of other companies in the same industry
- Strong balance sheets with zero to no debt
- Real tangible assets backing every share such as real estate, factories, and cash
Which is better: growth or value?
Both growth stocks and value stocks offer profitable investment opportunities to their shareholders. When it comes to comparing the historical performances of the two types of stocks a research analyst named John Dowdee did a study between 2000 to 2013 which showed that value stocks have outperformed growth stocks in those 13 years. From 2007 to 2013 growth stocks posted higher returns than value stocks. Value stocks tend to outperform recessions while growth stocks tend to excel during both markets. In my opinion, a portfolio with a good mix of growth stocks and value stocks is the best way to achieve a high return that beats the market. For the investor who likes low risk and steady dividends, I would invest in value stocks. For an investor who can manage risk and is okay with high volatility, I would invest in growth stocks. Both of these investment strategies are highly profitable.