• Wealth Management Division

Growth vs. Value: What You Need to Know

The talks about value and growth have recently spiked as growths stock began to slow down while value stock seemed to improve its stance in the current market environment. But what is the difference between value and growth, and why should you know and understand these differences?

Investors are sometimes perplexed by the distinctions between growth and value stocks. The major distinction between them is neither in how they are purchased or sold nor in how much ownership they represent in a company. Rather, the distinction is mostly in how they are viewed by the market and, therefore, the investor.

Typically, growth stocks are associated with high valuation stocks, which trade at higher price-to-earnings (P/E) multiples and grow and earn, and are expected to continue growing and earning, at an above-average pace relative to the market or industry. Growth stocks often have high P/E as well as price-to-book ratios. The P/E ratio is calculated by dividing the market value per share by the current year's earnings per share. For example, if a stock is trading at $100 per share and has earnings of $4 per share for the previous 12 months, the P/E ratio is 20. The price-to-book ratio is calculated by dividing the share price by the book value per share. Growth stocks are frequently valued highly in the open market; hence, growth stock investors may see these stocks as valuable and be willing to pay more to hold such shares.

Growth stock investors get returns from future capital appreciation (the difference between the amount purchased for a stock and its present value), rather than dividends. Although growth stock stockholders are occasionally given dividends, it has traditionally been more typical for growth corporations to reinvest retained earnings in capital projects.

Growth companies can be perceived as pricey and overvalued at times, which is why some investors favor value stocks, which are perceived as undervalued by the market. Value stocks are ones that trade at a lower price in comparison to their fundamentals (including dividends, earnings, and sales). Value stocks have strong fundamentals in general, but they may have fallen out of favor in the market and are regarded as underpriced in comparison to their competitors. They may have values that are lower than the stocks' historical levels, or they may have reached a point of no substantial growth and hence are no longer regarded as much by investors. It's also plausible that these businesses have been impacted by a situation that raises questions about their long-term prospects.

In general, value companies have low current price-to-earnings and price-to-book ratios. Investors purchase these stocks with the belief that their value would rise when the broader market sees their full potential, which should result in higher share prices. As a result, investors expect that if they acquire these companies at low prices and they eventually rise in value, they would be able to make more money than if they bought in higher-priced equities that rise in value moderately.

Stock investment styles include growth and value. Neither technique guarantees stock market value appreciation; both include investment risk. Stock returns and primary values fluctuate in response to changes in market circumstances. When shares are sold, they may be worth more or less than their initial purchase price. Investments that seek higher rates of return also carry a higher level of risk.

Growth and value investments tend to follow a cyclical pattern. Understanding the distinctions between them may assist you in determining which may be suited to assist you in pursuing your individual goals. Whatever style of investor you are, both growth and value stocks may have a place in your portfolio. This approach may assist you in managing risk and maybe increasing your profits over time. If you are unsure about what is best for your portfolio, check with your financial adviser, or feel free to contact us for a free portfolio analysis.


The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investment goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.

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