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Apr 12, 2018

Growth vs. Value Stocks: Finding a Balance

By Stash Team

Weighing fast-rising growth stocks vs. good-bargain value stocks? Choosing which belong in your portfolio is all about balancing risk and reward.

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Choosing stocks can be like choosing a new car. Do you want performance, or do you want something economical? Sometimes you can have both, but typically you have to make some tradeoffs. It’s a similar thing with stocks. Do you want a stock that the experts on TV are hyping up nonstop, or do you want to snap up a more reliable stock? 

Speed or economy? Hype or slow and steady? These are the questions investors wrestle with when choosing between growth and value stocks. Let’s take a drive through the difference between growth stocks and value stocks to give you the lay of the land. 

Stock fundamentals

A stock is a sliver of ownership, or equity, in a company. Thus, when you buy a company’s stock, you are buying a tiny portion of the company. Stocks are also called shares.

There are different kinds of stocks, and stocks can be divided into a number of different categories, including growth stocks and value stocks.

The difference between growth stocks and value stocks

With growth stocks, the name says it all: they’re rapidly growing in value. You’ll often find that growth stocks are issued by companies that are getting a lot of media buzz—and usually posting impressive earnings too.The enthusiasm for these companies often translates into increased demand for their stock, which means higher share prices. As share prices rise, the investors who own those stocks receive more profit—that is to say, they’re seeing fast growth.

Value stocks, on the other hand, are shares trading at a bargain price. But “value” doesn’t necessarily mean cheap. Instead, think of it as buying shares at a good price. In general, the stock price is a bargain when the shares are worth more than you’re paying for them. (Investors call these stocks undervalued.)

Growth vs. value: Stock categories are about the current market

Whether a company’s stock fits into the growth or the value category depends on the current market. For example, growth and value stock outlooks can change quickly if an undervalued company releases an innovative product—or if a rising star’s latest venture flops.

Growth stocks gain market momentum for a number of reasons. Typically, it’s because the company is doing something new and exciting that drives up demand for shares, or has some sort of market advantage. It might be on the verge of making a clean energy breakthrough, disrupting the way we get our groceries, or releasing a new cancer treatment.

Value stocks, in contrast, are often shares of a company whose price may be cheap compared to peers in the same industry or their own potential for earnings growth. These companies may have slumped in the markets for the moment, despite having generally strong performance otherwise. In most cases, you may want to buy a value stock with the expectation that its price will increase—though probably not as aggressively as a growth stock.

One key difference between growth stocks and value stocks you may wish to bear in mind: growth stocks usually tend to be more volatile. That means their performance may be less predictable. If you’re excited about growth stocks but concerned about risk, you might want to consider balancing out your risk level with value stocks and bonds. 

Examples of value and growth stocks

There are no hard-and-fast rules that define the difference between a growth stock and a value stock—even experienced investors and consultants don’t have a magic formula. But one way to think of it is that value stocks are flying under the market radar, while growth stocks are the current market rockstars.

Here’s another analogy that may help: you can think of growth stocks as Tesla SUVs and value stocks as Land Rovers. A Tesla SUV is a cool status symbol these days, and they’ve developed a proven track record of popularity over a relatively short time. Land Rovers, likewise, are highly sought after. But their popularity has been sustained over decades—and they still have thousands of devoted fans, despite not attracting as much recent attention.

At the most basic level, value stocks have low share prices in relation to financial performance. If a company has a track record of growing sales, increasing earnings, and positive cash flow, it’s likely to be an attractive investment. If it checks all of those boxes and its share price is still relatively cheap? It might fit the bill as a value stock.

Growth stocks, on the other hand, tend to be more expensive. They’re in high demand, causing their prices to increase. These companies are also typically posting high earnings (think Amazon, for example, which is currently trading above $3,000 per share as of October, 2021), and tend to be out of step with the broader market. Even when markets dip, growth stocks may keep flying high—but these shares can also plummet, even when the rest of the market is on an upswing if things change with the company.

Growth vs. value stocks? It’s all about the balance.

So what’s right for your portfolio, growth vs. value stocks? Maybe both. To keep your holdings diversified, you may want to invest in a mix of companies: both classic solid bets and new, dynamic companies with high potential. Balancing growth stocks with value stocks in your portfolio may help maximize your earning potential while lowering the overall risk. And with Stash, you can purchase fractional shares, which means even big-ticket stocks—value or growth stocks—can find a home in your portfolio.

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