Value Investing vs Growth Investing

Investors are often confused between value investing and growth investing. There are fundamental differences between these two strategies of investing. Let us try to understand the differences between the two and what they entail for the investors.

Value investing entails looking at the intrinsic value of the stock as against its current market value and identifying those stocks that are currently trading below their intrinsic value due to some temporary factors. It is assumed that the current market price of the stock does not reflect the intrinsic value of the stock; in other words, the stock is undervalued and, therefore, it is a good buy. Value investors invest such stocks assuming that the market price will soon catch up with the true value of the stock and they will be able to make profit. These stocks usually have strong fundamentals, but their prices decline due to temporary factors, thereby creating an opportunity for value investors. These companies can be identified based on consistency in earnings, high dividend pay-outs, high book value and strong cash flow.

Growth investing, on other hand, looks at the future growth potential of a company rather than the current market price of the stock. If a company has tremendous future growth potential, growth investors buy such stock despite its lower intrinsic value. Such companies usually operate in industries having fastest growth rate and, therefore, growth investors reckon that the faster rate of growth in earnings of these companies will translate into higher stock prices in future. These companies can be selected based on the rate of growth in earnings, profit margins, return on equity, etc.