The stock market is full of intricacies that even experienced traders need to brush up on from time to time. In a lot of cases, investing has its own language. New terms are often created to help give context to differences in the system.
One such example is value stocks vs. growth stocks, terms used to further describe the earning potential of any given stock. If you’re considering investing, knowing the difference can help make an impact on your bottom line.
What Are Value Stocks?
As the name suggests, value stocks present an opportunity to get a stock at a lower price than it may really be worth, thus giving you good value. The inherent value of a stock can be hard to pin down, however, meaning value stocks aren’t easy to spot. Usually, value stocks come from well-established, highly-regarded companies.
For whatever reason, the stock price dips below what it’s expected to be, giving an investor the chance to buy it below market value. A good example would be if an executive at a company was involved in criminal activity, leading to high profile news coverage and the company’s stock suffering as a result. The news will eventually move on from the story, and the company will rebound shortly after.
Value stocks generally present low risk but relatively low upside as well, since the return on your investment is limited by how much the stock is being undervalued.
What Are Growth Stocks?
A good candidate for a growth stock is a company that has a very high earning potential in the future. The company itself can be any size, as long as experts expect that in the future it will grow and control a larger share of its market.
That means growth stocks come with an added level of risk since you’re investing more in future projections than you are on past performance. But they also come with higher upside, as unlike a value stock there is theoretically no ceiling for a growth stock.
Imagine if a company announced a brand new line of self-driving cars that would make them the leaders in the market. Investing before the cars are rolled out gives you a chance to see tremendous growth in the stock price if the product actually dominates in the field. However, if the cars end up with serious issues, the stock price could quickly tank and turn into a loss.
Does the Difference Matter?
First and foremost, there are a lot of different ways to make money through the stock market. Value and growth stocks represent two very different ways that you can earn a return on investment by following markets closely. There’s no definite answer as to which type of stock is better, as it depends on your investment approach and risk tolerance.
However you decide to invest, value and growth stocks both show the importance of research, Always do your homework before making an investment, that way you can be confident in where you’re putting your money.