23 Jul Growth v/s Value: Two Ways to Select the Right Stocks

Different approaches

The two basic approaches to stock mutual fund investing are through growth and by value. On one hand, mutual fund managers look for stocks of companies that can offer a strong potential in earnings growth. On the other hand, value fund managers prefer to invest in stocks that are viewed as performing below value in the marketplace. It is also possible to combine the two methods for investing in mutual funds.

Growth stocks

While searching for companies with a strong growth, it should be remembered that these companies seek to achieve high levels of growth even in slower periods of economic growth. One must also not ignore newer companies that have the potential for higher earnings, but do not have a history to support the claim for future potential growth.

Value stocks

Value stocks are generally those that have been ignored in the market and believed to have less potential for profit. These stocks are sold at a bargain, and are priced much lower than stocks from similar companies in the marketplace.

Contrasting the two stock types

The main methods for defining the value of growth and value stocks are their price to earning ratio and their price to book ratio. Growth stocks are in general, more highly priced than value stocks.

Separate strategies

Choosing either kind of stock to invest in leads to differing investment strategies. Growth fund managers aim for high performing companies and are expected to perform well in the future as well. Value fund managers search for companies that are considered unlikely to perform well or have low earnings. This is done with the belief that the company will experience a resurgence in the near future and the value of the stock will rise.

Conclusion

Both kinds of stocks have at intervals, outperformed each other and taken the lead in terms of profit earnings, but a definite answer as to which stock makes for better investment is still being debated upon.

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