Please enable JavaScript.  This webapp requires JavaScript to work at its best.

Market News

Growth investing or value investing?

22/12/2020

There are two basic approaches to investing in stocks: growth investing, and value investing. While it’s possible to go for a mixture of the two, investors will often choose one or the other. Here, we explain what both methods involve – and look at both past performance and the predicted future.

 

What is growth investing?

Growth stocks, as the name suggests, are companies that have been growing well in recent years, and that are expected to continue to do so. Often, these can be relatively young companies that are growing fast, reinvesting their profits back into the business to continue their growth. Once they reach maturity, they will often pay profits out to investors in the form of dividends.

Generally, growth stocks will be priced higher than the market average, may have a history of high growth despite poor economic conditions, and they may be fairly volatile – their price can drop significantly with any negative news about the company.

 

What is value investing?

Value stocks, on the other hand, tend to be older – and while they have a strong underlying value, this value is not being recognised in terms of market performance. While currently underrated, value stocks are predicted to have their market value recognised in the near future, at which point their price will rise.

Value stocks tend to carry a lower level of risk than growth stocks, and are priced below similar organisations in their market sector. This may be because investors are showing a reaction to recent negative news about the company, such as legal problems or poor earnings. However, the idea is to invest while prices are low, with the view that they will bounce back.

 

Is one approach better than the other?

According to the Bank of America, value investing has returned 1,344,600% since 1926. In the same period, they say, growth investing has returned 626,600%. On the face of it it would seem that value investing is the only choice – but studies suggest that growth investing has outperformed value investing in recent years.

The ultimate decision, however, will depend on you: your risk profile, your investment objectives, and the length of time you’re willing to wait to see a return.

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

TAGS
Investing

Share this article

More reading
Forgotten your password?