Growth vs. Value Investing
Understanding the difference between a growth stock and a value stock is helpful in designing and diversifying your portfolio.
While selecting stocks or funds, it helps to understand what's growth vs. value because the fund or company's characteristics will impact the risk and return profile of your portfolio. And these two types of investment strategies can be challenging to differentiate if one doesn't quite understand the typical criteria for classifying them.
In this bubble, we'll help you simply understand the nuances between a growth investment and a value investment!
Value investing is a strategy for identifying cheap or undervalued stocks based on financial ratios. In contrast, growth investing focuses on companies expected to grow at above-average rates compared to the market.
One of the key parameters value investors use is the price-to-earnings ratio (P/E ratio). It's a metric that helps investors determine the market value compared to the company's earnings. The P/E ratio shows what the market is willing to pay today for a stock based on its earnings.
Growth investors tend to favor younger companies poised to substantially grow their revenue and earnings in the future. When evaluating stocks, growth investors look for historical and future earnings growth and several other parameters.
Both growth and value investors may (or may not) rely on analyst price targets. A price target is when an analyst believes a stock is fairly valued relative to its earnings. When an analyst raises their price target for a stock, they generally expect the stock price to rise. But keep in mind that analysts are not always very good at predicting stock prices! So, think twice before basing your decision on a price target.