What is the difference between a growth or value stock? These terms are often tossed around on CNBC, where they often speak about value and growth stocks, as well as other financial websites but what exactly do they mean?
A growth stock, as the name suggests, is a company who has a strong growth rate projected over the next few years. Growth companies usually have a strong return on equity, otherwise known as ROE. Another thing to look for in seeing if a stock is considered to be a growth stock is the company’s ability to grow EPS, earnings per share. Growth stocks are more suitable for risk-tolerant investors as well as younger investors.
A value stock is a stock that has been proven itself in the past and plans to continue to steadily build more value into the future. It is much harder to find an undervalued value stock rather than an undervalued growth stock due to the fact value stocks are easier to predict growth patterns and sustainability, this is because they have proven themselves in the past. On top if this value stocks often rewards shareholders for holding their shareholders with dividends Value stocks are often considered to be ‘safer’ investments due to their predictability and dividends. therefore they are favorable to older investors heading towards retirement or low-risk tolerant investors.
Which Is Going To Earn You More Money?
This is where diversification comes into play, you want a solid balance of growth and balance stocks within your portfolio. Generally, if you are younger investor you want to look to take some chances for more upside potential. However, you may want to mix in a couple strong value stocks to create stability within your portfolio. What is the proper balance? That’s up to you and your preference of risk and investment term length.