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What Is the Difference between Value Stock and Growth Stock?

Felicia Dye
Felicia Dye

Value stock and growth stock are two categories of investments that can accomplish profits using different strategies. A growth stock is one that will continue to increase in value. Stock in the value category is that which can be purchased for less than its true worth. Different criteria are generally used by those making stock selections based on growth and value.

The first thing that should be understood about value stock and growth stock is that there are no authoritative definitions of these terms. Although investors may tend to largely agree about which stock falls into which category, there is not an official list or procedure involved in making this determination. To make a decision about which category stock should fall into, a person should learn the common criteria for each.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Both value stock and growth stock offer the opportunity for significant returns, but the returns are based on different factors. For example, growth stock can be summarized as that belonging to companies that appear to be on an upward rise. A person making this type of investment will generally consider factors such as earnings increases and the sustainability of the company's growth.

The extent to which growth history matters to a value investor is an area that can be debated. Some investors may place a stock in the growth category based primarily on projected growth. Other individuals will want to see convincing levels of growth over an extended span of time and will want strong projections.

Earnings per share (EPS) is a factor commonly assessed when evaluating a potential growth stock. This figure tells how much profit is available for a company's outstanding shares. It can help an investor to determine whether the revenue that a company generates is boosting earnings, which is an important factor for a growth investor.

Value stocks can be summarized as those that appear to be accessible at a bargain. This does not mean, however, that these companies are in financial trouble. On the contrary, companies with stock in this category generally have assets that are substantially higher than their liabilities. The value is acquired because the stock is undervalued when it is purchased. The investor foresees that a stock purchased today at $20 US dollars (USD) will be worth $30 USD next month.

When assessing potential value stocks, price-to-earnings (P/E) ratios are commonly considered. This is a measurement of a company's current stock price compared to its price per share earnings. It essentially communicates whether a stock's value is overpriced or undervalued. Making an accurate determination generally involves comparing one company's P/E to its industry averages.

Investment professionals generally avoid labeling either of these types of investments as the better of the two. Investors are encouraged to own both value stock and growth stock. The percentage of each will vary depending on an individual's goals, investment strategy, and the current market conditions.

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