In stock investing, there are different terms that are often used to explain various investment concepts. For those of you who are planning to venture into the stock market or are already in this business, you must have heard of a growth stock and value stock. These are common terms used in investing but what exactly do they mean?
It is difficult to come up with a clear and set definition of growth and value stocks. However, there are some criteria that are used to define these stocks. It’s important to mention that growth and value are not only methods of investing but also act as a guide for investors to narrow down their options and know what to invest in. For those who understand the stock market well, you will agree that there are times when growth stocks perform very well and others when value stocks excel. It is a wise investment practice to have stocks in a diversified portfolio in order to cut down on your risks.
Growth investors are those who focus on growth investing that revolves around a stock that has exhibited a potential to grow. On the other hand, value investing focuses on under priced stocks but still have enough room to increase. Growth stocks are usually associated with strong growth capabilities. Here, investors are keen on having a stronger return on equity. If you are interested in growth investing, you need to take into account both the pre-tax earnings and the earnings per share. Once this has been done, it is wise to project the future stock price in order to have a good idea of how much you are likely to earn.
As a growth investor, you need to be wise and use your judgment and common sense to make wise decisions. It is possible that the stock might currently not meet all the criteria but still has a chance to qualify as a solid growth stock.
Some people think value stocks are cheap stocks which is not the case. However, there are some instances where value stocks are listed alongside the lists of firms that have hit a 52-week low. For investors, value stocks are used as the bargain for investing. The ultimate aim of value investing is to select stocks that are under priced and wait for the prices to attain their ideal market rates.
How do you identify value stocks? A good way to choose a value stock is to find stocks with a price to earnings growth ratio of less than 1. The price earnings ratio should rank at the bottom 10% of all firms. A good value stock is one whose share price is a tangible value.
There are investors who prefer to focus on one type of stock and ignore the other. This is not a good strategy because diversification of portfolio of both value and growth stocks is the best and guaranteed ticket of obtaining good returns. If you are a beginner, investing in both stocks is a good starting point.