Of the many investment terms thrown around with little explanation for the typical investor, growth and value stocks tend to be the most misunderstood and confusing. Like many facets of investing, however, the terms growth and value aren’t necessarily as confounding as they might initially sound.
Growth and Value Basics
In a nutshell, both terms indicate where a particular stock might be trading relative to certain underlying fundamentals and perceptions. Although there can be some slight variance in definition between different investment firms, publications, or commentators, growth and value are two different approaches to equity investing that focus on projected appreciation in the case of growth positions or purchasing undervalued stocks in a value-oriented approach.
When a stock displays strong earnings and investors project healthy future appreciation prospects, that stock is considered a growth equity. Growth investing relies on the traditional notion of purchasing a stock or group of stocks that will grow well in the future by displaying consistent and solid fundamentals like earnings-per-share.
Alternatively, value investing looks for stocks that appear to be undervalued by the markets with respect to their fundamentals. Think of value stocks as being on sale for a certain amount of time and can be purchased at bargain prices that will benefit your portfolio once prices start catching up with fundamentals.
While certain stocks can be defined as either growth or value for extended periods, no single position will ever be permanently categorized as either. In other words, while a particular stock might be considered value today, it could very likely be a growth stock just a few years down the road.
Which Is Right For Your Portfolio?
The differences between growth and value investing don’t necessarily make one right or wrong for you and your investing strategy. Instead, both can play an essential role in your portfolio like any other form of investing or investments. Simply from a diversification perspective, holding both growth and value stocks in your asset allocation can help minimize the impact of volatility over the long run.
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