Stock Investment Guide - Growth and Value stocks


Growth and Value stocks
Stock investors keep hearing the terms like growth stock and value stock or growth and value investing. The difference between the two may not be clear to most investors. What is the difference between a growth stock and a value stock? What exactly is value and growth investing? There are no precise definitions of growth and value stocks. There are certain criteria that generally defines and differentiates these different stocks. Some stocks can fall into both parameters of value and growth stocks. Growth and value aren't just investing methods, but they are a way for investors to narrow the stocks they will invest in. Stock market history has shown us that they tend to take turns. There are periods when growth stocks do well, and other periods in which value stocks excel. The best investment strategy for the average investor is to hold both in a diversified portfolio. Growth investing involves focusing on a stock that is growing with potential. It can be the stock of a company with a past history of strong growth and can be in a sector which is growing rapidly or has great potential growth in the future. Value investing seeks stocks that the market has under priced that have a potential for an increase. Sometimes during a bear market or a volatile market certain stock prices can be hammered down by market sentiment, whereas in reality the stock should be valued much more according to the performance of the company. Such undervalued stocks form the basis of value buying and are considered value stocks. Whenever the stock market will stabilize these value stocks will find their true value. Growth stocks usually feature strong growth rates. The growth rate in a small company should be 10% or higher for the past five years, while larger companies need to post a 5% to 7% growth rate. There should be a strong return on equity. Consider the earnings per share and the pre-tax margins. Look at the projected stock price for a clue of potential returns. Stocks based on value and growth can be stocks which are part of mid caps but based on growth and sound management these stocks have the potential to come under lager cap within 2-5 years. Investors should note that even during volatility such stocks never go beyond a limit , and bounce back as and when market bounce back. Investors should check the financial record of last few years and also see that the company has rapid growth with reasonable cash flow. When considering a growth stock, you need to use your judgment and common sense. The stock might not meet all of the criteria, but still show signs of being a solid growth stock. For example, it might be a new company with not much past track record. but still be a significant player in a growing new industry. Value stocks are often confused for cheap stocks, which they are not. However, you may find value stocks listed on the lists of the companies that have hit a 52-week low. Investors look at value stocks as the bargains of investing. The idea is to choose a stock that is under priced and wait for the market price correction. Consider the price earnings ratio, which should be in the bottom 10% of all companies. Look for a price to earning growth ratio of less than 1. A good value stock has at least as much equity as debt, twice as much liability as assets and a share price at tangible book value or less. While there are investors that tend to focus on one type of stock over another, a diversified portfolio of both growth and value stocks will provide you with good returns. If you are a beginning investor, this is an ideal combination. If you find that you have only of them in your holdings, you should consider the benefits of diversification. Long

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