Difference between growth and value stocks

Last Updated: 4 Feb 2025

Understanding the difference between growth and value stocks is crucial for investors aiming to diversify their portfolios. Growth and value stocks represent two distinct investment strategies that cater to different financial goals and risk appetites. By analysing these differences, investors can make informed decisions that align with their investment objectives. While growth stocks focus on companies expected to grow at an above-average rate, value stocks target companies perceived as undervalued by the market.

Value stocks vs Growth stocks: Meaning and definition of Growth and Value stock

• Value Stocks

  Value stocks are those that have a unique feature working in their favor which results in the potential to create value over time. Value stocks are associated with big, well-established companies that are trading below their fair market value as per the analysts.

  For example, a company’s stocks may be trading at Rs 250 currently. However, analysts may feel that after finding the fair value (outstanding shares divided by the company’s capitalization), the fair book value of the stock is Rs 350. Believing the stock market principle that every stock reaches its fair book value sooner than later, you can invest in these stocks. Value stocks offer regular dividends to the shareholders but do not rise their share price by a huge margin.

• Growth Stocks

  Growth stocks are those that present a high-profit potential to investors as their share price rises rapidly. Usually, the growth stocks outperform their peers and the industry, which is amply reflected in the premium valuation commanded in the market by the stocks of such companies. Growth stocks do not promise regular dividends as they prefer investing their profits in expanding the company. Notably, companies with growth stocks are relatively new and not well established. Their goal is to garner as much market share as possible, which they believe is only possible by expanding the business.

Value investing Define

Value investing focuses on identifying stocks that are undervalued in the market. Investors seek to purchase these stocks at a lower price, anticipating that their true value will eventually be recognized, leading to price appreciation. This approach emphasizes a long-term perspective, often requiring patience and thorough research. The strategy involves a deep understanding of financial statements and market conditions. Comparing growth stocks vs value stocks highlights how value investors prioritize intrinsic value and market inefficiencies, aiming for stable returns over time.

Growth investing defined

Growth investing targets companies expected to grow at an above-average rate compared to other firms. These companies often reinvest profits to fuel expansion rather than paying dividends. Investors focus on the potential for significant capital appreciation. The difference between growth and value stocks is evident, with growth investors prioritizing future potential over current market value. This strategy is suited for investors with a higher risk tolerance, aiming for substantial gains through the capital growth of selected stocks, often in emerging industries or innovative sectors.

How do growth and value stocks work?

In the argument of value stocks vs growth stocks, the idea is simple. It is entirely value vs growth. It is up to the investors to identify their goals of goals-based investing and choose value or growth stocks accordingly. Notably, growth stocks are more volatile than value stocks but have the potential to rise in price substantially. On the other hand, value stocks are low-risk, and offer regular dividends but can’t fulfill short-term investing goals.

The basic idea behind growth and value stocks is to invest in growth stocks to achieve short-term goals and in value stocks for achieving long-term goals. Almost all investors hold value stocks for the long term as it offers them steady returns and appreciates at the share price. As growth stocks usually don’t pay dividends but appreciate by a huge margin, you can invest in them for the short term and sell all of your holding or book profits to cover your expenses.

The best way, as per experts, is to diversify within the growth and value stocks. You can divide your capital and allocate a portion for investing in growth stocks and the rest for investing in value stocks. That way, you can ensure you can achieve both your short and long-term financial goals.

How do identify growth and value stocks?

Growth stocks usually have low dividend yields but above-average valuations. The high valuations commanded by these stocks are measured in terms of price-to-earnings (P/E), market capitalization-to-sales, and price-to-book value ratios (P/B).

In the case of value stocks, companies can run the business with low debt and equity. When the P/E is reasonable, and the earnings are likely to grow exponentially, you have a value stock in front of you. Furthermore, if the ROE (return on equity) and the ROCE (return on capital employed) are above 15% each and both are close to each other, it is the sign of a value stock.

How growth and value investing overlap?

Although distinct, growth and value stocks share common ground in their ultimate goal of achieving returns. Both approaches require meticulous analysis and an understanding of market trends. Investors may find opportunities where growth stocks vs value stocks intersect, as some companies exhibit characteristics of both categories. This overlap can provide diversified exposure, enhancing the potential for balanced returns. For instance, a company initially classified as a growth stock may become undervalued over time, appealing to value investors, thus illustrating the difference between growth and value stocks.

Investing in growth and value stocks

Investing in growth and value stocks involves different risk-reward profiles. Value investing typically offers more stability and lower volatility, appealing to conservative investors. In contrast, growth investing targets companies with high potential for rapid earnings expansion, attracting those willing to assume higher risk. Balancing growth stocks vs value stocks in a portfolio can create a comprehensive investment strategy. Diversifying between these two approaches can mitigate risks while maximizing potential returns, offering a robust investment framework that adapts to varying market conditions.

Final Words

With knowledge about the difference between growth and value stocks, you are better equipped to approach the stock market and start your investing journey. The first step would be to review your finances and determine your short-term and long-term goals. Once you have, you should figure out how much you can invest. The next step would be to open a Demat and trading account. A Demat account is used to hold the shares you buy, and the trading account is used to buy and sell them. You can open the Demat and trading account for free by visiting the IIFL website or downloading the IIFL demat account app from the app store. Once you have opened the two accounts, you can begin identifying growth and value stocks and invest appropriately.

Frequently Asked Questions

What are the advantages of growth and value stocks?

Growth stocks allow investors to make profits as they appreciate their price quicker than any other type of stock. Value stocks allow investors to receive regular dividend payments along with the stock appreciating at price steadily over the long term.

Q2. Which is riskier growth or value stocks?

Growth stocks are generally riskier due to their high volatility and reliance on future earnings potential. Value stocks, while more stable, can still carry risks related to market sentiment and economic downturns. The choice between the two depends on an investor’s risk tolerance and investment strategy.

Q3. Which is better value or growth stocks?

The choice between value and growth stocks depends on individual investment goals and risk tolerance. Value stocks offer stability and income, making them suitable for conservative investors. Growth stocks provide potential for higher returns, appealing to those willing to accept greater risk for significant capital appreciation.