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Value investing vs Growth investing

Value investing and growth investing are two different investing styles. These two styles compliment each other and having both of these is an advantage to your portfolio. The goal will be to weigh what is better for you, understand the risk and opportunities in both styles and make wise decisions.

Table of contents

  • Growth investing

  • Value Investing

  • What is the PE ratio?

  • What is the P/B ratio?

  • How to pick a value stock

  • How to pick a growth stock

  • Stocks in the long run: Things to keep in mind

  • Conclusion

  • A super important TIP

  • What to do now

Growth investing

These investors are trying to invest in those companies that are growing faster than the market to earn a bit higher than average returns. It's about finding the next big technology, app, or groundbreaking product which has the potential to dominate the market. These are particularly attractive for beginners or those who are trying to get a hang of stock picking.

They try to screen companies that are particularly 5-10 years into the rapid expansion of around 20% and sometimes these companies can tend to be smaller and younger. This can be hard to achieve for a bigger company because it has already achieved this feat already. But these days, goliath companies like Microsoft and Amazon continue to grow rapidly at a CAGR above 20%.

These companies try to build up their revenue, often at the cost of delaying profitability. After a point in time, they start focusing on profits. Growth companies tend to have high price-to-earning and book value ratios but see faster growth in revenue and income compared to their peers.

Value Investing

These investors are ready to put their money around more boring and stable companies that might also be experiencing a decline in performance. The primary criteria aren't how big the company is instead investors here see the value the company has. This is a bargain the investors look to hunt and paying 95 cents for a dollar is the value. So, value investor looks at the fundamentals of a company and identify these stocks which are selling less than what they should be.

By finding these stocks, the investor stays put and waits till the prices return back to their original intrinsic value (Value which the company should be), thereby profiting from this. In some cases, investors put their money in declining companies or bankrupt companies in an analysis that they will get the money back in the future or in the liquidation process.

What is the PE ratio?

Price to earnings ratio is a common analysis tool used to evaluate the present stability of the company. We divide the current share price with the earnings per share of the company. The share price is the price that you see on the screen when you pick a company. Earnings per share are got by dividing the earning of the company in that annual (year) by the total number of shares the company has. This tells how much I am paying per Dollar of annual profit. By this, we can see which company's stock prices are cheap and which are expensive.

What is the P/B ratio?