What Are Growth Stocks and How They’re Different than Value Stocks.

 What Are Growth Stocks and How They’re Different than Value Stocks?

Investing in growth stocks can be a great way to increase your wealth over the long term. But this strategy also comes with greater risks than investing in more stable securities. Let's take a look at what growth stocks, how they are compared to value stocks are and how you can smartly invest in them.

What Is a Growth Stock?

A growth stock is a stock in a company that is performing high above average industry returns. The company is growing rapidly, and its cash flow, revenue, and earnings are expected to outpace the competition. Usually, the company has some sort of lock on a market, whether that be radical innovation or a strong patent on an in-demand product.Not all growing companies qualify as growth stocks. While there is no one formula to determine what qualifies as a growth stock, there are general terms. Growth stock companies are generally expected to:

Grow at 15% or more return on equity annually

Have shown a strong stock performance historically

Have strong profit margins

What Is Value Investing?

Value investing, on the other hand, is about trying to identify assets that are undervalued by the market. The idea is to find assets that offer a good bargain. Maybe the company is experiencing a temporary setback, but the fundamentals are still strong. Or perhaps it's a relatively new stock that hasn't been widely recognized as valuable yet.

No matter how it's done, value investing is about looking at assets and investing in those that are priced lower than they should be. You invest in them with the hope that they will head higher later as others recognize their value.

Growth vs. Value Investing — Which Is Better?

One of the most important things to consider when deciding between growth vs. value investing is that one approach is not inherently better than the other. What you choose depends on your own style, as well as the goals you have for your portfolio.

• Growth investing is for quicker results– If you hope to amass a larger portfolio in a shorter period of time and see quicker results, a growth approach can work well.
• Value Investing is for consistent returns — If you have a long period of time to grow your wealth and beating the market isn't one of your major objectives, value investing can be an excellent way to see consistent returns over the long haul.

You Can Switch Styles as Life Goes On — Realize that as your portfolio grows and you reach different life milestones, it may be appropriate to switch styles. You don't have to stick with one approach or the other forever. Instead, you can shift strategies over time. Later on, you may decide that neither growth nor value investing is right for you. Other investing strategies, like income investing, may make sense as you approach retirement or as your goals change.

Combining Growth and Value Investing

it's important to note that you don't have to choose between growth vs. value investing. It's possible to incorporate both into your portfolio. You could include some growth assets to help accelerate your portfolio's growth while still keeping a portion of your portfolio in value assets.

When you use both approaches in your portfolio, you can offset some of the disadvantages of each type of investing. For example, if market volatility is hitting your growth assets, some of your value assets could hold steady and reduce the overall risk of your portfolio during this time.

Additionally, if you're afraid the value approach won't allow you to build your portfolio quickly enough, adding growth assets can help you accumulate more earnings. When used together, growth and value investing can provide a complementary portfolio construction.

It's possible to use growth and value asset allocation to meet your goals and shift your allocation as your needs and objectives change over time.