There is no single right way to invest in the stock market. Interested market participants have always employed different investment strategies to choose the best possible securities for their portfolios. These strategies vary based on each investor’s goals, financial capacity, and risk profile.
Of the many investment techniques available, value investing and growth investing are pretty popular amongst investors. By selecting the strategy best suited for their needs, investors can make all the difference to their portfolios.
But how to know which route is the better option for you in today’s market conditions? Well, to decipher that, let’s see what each strategy entails.
What is value investing?
Every stock listed in the market has an intrinsic or true value determined through fundamental analysis. In some cases, the market price of the listed stock tends to be lower when compared to its intrinsic value, making them undervalued. Over time, the market participants expect such stock prices to rise, reflecting their inherent value and leading to capital appreciation for the investor.
This approach sums up what value investing is all about. It involves identifying undervalued stocks and investing in them today so that when the prices correct to reflect the intrinsic value later, the investor can profit from the price movement.
Value investing can be beneficial in many ways but requires due diligence on the part of investors to make it a success.
Benefits of value investing: It is a low-risk, high-reward strategy; taps into the power of compounding; is suitable for investors across different income groups; increases your exposure to blue chip companies.
For this approach to be successful, you require a lot of patience, a thorough understanding of the business you are investing in and the know-how to estimate the correct intrinsic value of stocks.
What is growth investing?
Growth investors chase stocks that have the potential to be above-average performers. They believe that if a share has demonstrated tremendous growth in recent years, it will continue to do so in the future too. Thus, their investment strategy involves investing in companies with a track record for performance and growth.
These stocks may be of emerging or young companies, but the critical element is the potential for significant growth in the future. Shares of such companies may already have high prices, but growth investors often expect the prices to rise even further, leading to gains.
Growth investing has its advantages, but there are a few factors that an investor should consider while implementing this strategy.
Benefits of growth investing: The potential for high returns is greater; no need to assess the intrinsic value of a company; diversify your portfolio across sectors; this strategy may help you beat inflation.
Things you need to keep in mind: You need to identify the right stocks; the risk of selected stocks underperforming can be high; the level of volatility in such stock prices is also high.
Value investing vs. growth investing: Which route to take?
As you can see, the two investment strategies outlined above are quite different in their approach. Value investing focuses on fundamentally solid companies priced lower than they should be. Meanwhile, growth investing revolves around companies with a high future potential for a price increase, even if the price is already relatively high.
How do you know which route is the better option for you? Value investing is better suited for investors who are conservative about risk-taking as it primarily relies on the fundamentals of the invested companies. However, if an investor is comfortable taking on more risks in the trade-off for benchmarked-beating gains, then growth investing is the right strategy.
If you are still unsure which side of the fence you are on, you can always approach a financial planner or an investment advisor for more assistance. These experts can guide you on different investment strategies and help you choose the right approach based on your financial goals and capacity.