The friend of a novice investor and also of a risk-taker, Value Investing is all about investment in stocks that are undervalued and possibly ignored by investors but have a possible scope for appreciation in the future. Value investors believe that the market movements, being emotionally triggered, don’t offer a fair view of the company’s performance. A negative slide in the stock prices of companies is looked at as an opportunity by these investors.
Value investing entails looking at Price-to-book and Price-to-earnings ratios of stocks that are lower than average and compared with the company’s intrinsic value. An investment is made when this value is high enough after considering a safety margin for calculation inadequacies.
Arguably the most popular investment method, Growth Investing entails focusing purely on capital appreciation. Growth investors choose stocks whose prices are expected to grow at a better rate as compared to its peers. There are many ways to create an investment plan that focuses on a capital appreciation. Some such strategies include investing in small cap stocks with a huge potential to grow or blue chip stocks or emerging market stocks.
Growth investing requires an analysis of the company’s historical performance and overall management to assess the possibility of generating returns that outperform the market averages.
Growth and Value Investing can also be deployed as two elements of a portfolio to benefit from the current performers as well as the underdogs. Typically, growth investing earns returns when the market is rising and value stocks perform when the markets fall.