Value vs Growth Stocks: 7 Big Differences You Should Know About

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Do you want to learn how to speak stock?

If you’ve ever listened to investors talk it can seem like their speaking in a different language. Between phrases like bull and bear and indistinguishable terms like “growth” and “value” how do you know what’s what?

Have you ever lied awake pondering the difference between these 2 terms? Or have you’ve ever listened to a conversation between 2 stockbrokers and stood there scratching your head and wondering what they’re talking about?

If this sounds like you then check out our guide to understand the difference between value vs growth stocks.

Value vs Growth Stocks a Quick Overview

If you’re struggling to understand the difference between growth vs value stocks don’t worry even seasoned investors don’t get it completely right. As a rule, the difference boils down to how the market perceives them.

This difference can be measured in a variety of different ways but one of the easiest ways to analyze this difference is using an equation called the P/E ratio or the price-to-earnings ratio.

The price-to-earnings ratio measures the difference between the companies stock price and its earnings per share.

On a side note, the earnings per share measure the companies net income against it’s the total amount of common shares that are outstanding. It tells you how much money the company is making for its common shareholders.

This means the P/E ratio tells you how much the price of each stock compares to the amount of value it has to shareholders. To illustrate this if an investment is selling for $48 per share over the last year and the earnings per share have been $3 then its ratio is $16.

There is one more way to value these stocks and that is price-to-book ratio. This is thankfully more straightforward. It consists of the share price divided by the dividend. For example, if the price per share is $24 and the book value is $12 then the price-to-book ratio is $2.

In general growth stocks are considered the ideal stock. They make their money mostly through appreciating in value. Overall they have a higher P/E ratio and a higher price-to-book ratio.

1. Growth Stocks are More Expensive

Ever heard you need to spend money to make money growth stocks are the ultimate example of this. They are often associated with high growth successful companies. These can either be companies that have been making a great profit for decades or popular startups.

These stocks are often so sought after that on the open market people are willing to pay more to own these stocks.

2. Value Stocks are Less Expensive

When investors purchase stocks they often want their entire portfolio to increase in value. This makes growth stocks on the surface a better value.

The price is often determined by market demand. Since there is less demand for these the price is much lower and the growth will be much slower as well.

3. Growth Stocks are Riskier

No risk no reward. If you want to invest in growth stocks you’ll have to accept that it can be a bit of a gamble. This risk comes from the fact that whether or not the stock growth will be continuous is up to fate and can vary.

Also, stock growth goes hand and had with a volatile environment. If you want your stock to grow quickly you’ll have to accept some uncertainty.

They are on the whole less safe then corporate bonds which is something both growth and income stocks share.

One way to remedy this is with a call or put option also called binary options signals.

4. Value Stocks are Less Risky

Sometimes it’s best to play it safe especially if you’re an older investor. This is the best option for people who are risk-averse. These stocks may not make your investment portfolio look amazing but they do often provide steady growth and dividends.

These are often stocks that have been in the market longer but have lost popularity over time. And so their stock prices may be at a historic low.

Alternatively, they may be new companies that have not received much attention by the market.

Keep in mind that low risk doesn’t mean that there isn’t any risk.

5. Growth Stocks are Often Overvalued

As we said earlier the market often decides the fate of your stocks. If you’re trying to buy this may be a bad thing as you may be left with a stock that leads to a loss.

This is something to seriously consider if you’re trying to sell stocks on the open market.

6. Value Stocks are Often Undervalued

Depending on your perspective this may be a good or bad thing. If you’re selling stocks you may have a loss when trading value stocks.

But if your buying stocks you may have discovered a hidden gem and have a stock that provides you with dividends and appreciates in value.

7. Value Investing is all About Dividends

The biggest benefit to value stocks is dividends. Though they may not appreciate in value as fast as their counterpart.

When looking at the growth versus value stocks scoreboard the biggest downside of the growth stocks is that all the money that the stocks create in value often gets reinvested in the company. But when you have Value stocks you always have the promise of a dividend to which makes the investment safer.

Start your Investment Future Today

The difference between value vs growth stocks comes down to risk and market demand. Growth stocks are riskier and offer fewer dividends while value stocks are more stable but less sought after by the market.

If you want more investment tips to build your portfolio then contact us and we can help you.