Value Investing vs Growth Investing

Investing in stocks is an excellent way to grow wealth. What makes investing in the stock market so difficult is its high volatility and many investors are unable to stick with the stock market in the long run because of the ups and downs. However, Growth and value are two fundamental approaches or styles in stock investing.

Just as the name implies, Growth stocks are those companies that investors expect will grow much faster than others and are considered to have the potential to outperform the overall market over time because of their future potential while Value stocks are classified as companies that are currently trading below what they are really worth and will thus provide a superior return.

Understanding Growth Investing

Don’t expect dividends from growth companies right now. They offer higher upside potential but are inherently riskier. There’s no guarantee a company’s investments in growth will successfully lead to profit. For example, Growth stocks experience stock price swings. They are also more expensive as their stock prices are high relative to their sales or profits.

Value Investing (Warren Buffett’s favorite)

They don’t emphasize growth above all. Investors typically benefit from dividend payments and they typically have more limited upside potential.
Investors who opt for value stocks believe it is a safer investment than growth stocks. Valuation can be measured in multiple ways, including price-to-earnings and price-to-book.
Less “expensive:” Their stock prices are low relative to their sales or profits. Less risky: They have already proven an ability to generate profits based on a proven business model. Stock price appreciation isn’t guaranteed, with value investing, though investors may have properly priced the stock already.

One quick way to differentiate growth and value stocks is to compare their price/earnings (P/E) ratios, often considered a measure of how over- or undervalued a company’s stock is.

Do Value Stocks Really Outperform Growth Stocks over the long Run?Well, there is a school of thought that value stocks outperform growth stocks over the long run and this has been proven a number of times but ultimately, what matters to investors are the relative returns over an investor’s time horizon, not the relative returns over the past decade or past century.

The blended approach of growth and value investment strategies is one way you can do this to benefit from the economic cycles where the scenario may either favor value or growth stocks. This ensures a smooth return on investment over a course of time.

A savvy investor will tell you that there is more than one way of investing. A smart investor will make sure they mix their investment approach. Which are you?

What do I need to do

Whether you’re searching for growth or value stocks, take the toe-in-water approach. The best way to get started investing in the stock market is to put money in an online investment platform like Wealth.ng, which can then be used to buy shares of stocks directly from the Nigerian Exchange Group.

How much money do I need to start investing in stocks?
The amount of money you need to buy an individual stock depends on how expensive the shares are. The good part - you can actually start investing for the price of a single share. (can range from just some kobo to some thousand Naira).

Should I focus on the long-term?
Only a minority of investors believe that the stock market is the best long-term investment. As mentioned above, you are advised to choose individual stocks only if you believe in the company’s potential for long-term growth.

Got some cash to put to work? Start investing now