Investing in the stock market is far from an exact science. There is, therefore, no winning recipe that suits everyone: each investor makes his choices according to his goals, preferences, market view, risk tolerance leveland even the economic context itself. There are, therefore, different investment styles, or strategies, to compose a stock portfolio. In this article, we present the two major approaches – growth investing and value investing – which are based on two categories of actions with their own characteristics. As we will see later, the investor does not have to choose one path or the other. Portfolios have room for both types of stocks, and finding the right balance between them can be a recipe for success.
Growth stocks refer to companies seen as having the potential to see an above-average rise in earnings over time, outperforming the sector in which they operate or even the market as a whole. Either because they offer a service or product that is believed to be successful, or because they have any other advantage over their competitors, they are companies considered to be able to surprise positively, with a favorable evolution of your business and, with it, the results. These stocks typically trade at higher multiples (in a simple way, are more “expensive” actions) but investors are willing to pay this price in exchange for the possibility of a higher return in the future. Because, as we have seen, they are associated with a great growth potential.On the other hand, these are companies that usually do not pay dividends investors, preferring to invest profits in business expansion. In the case of companies with innovative products or services – as in the case of technology sectorwhere there are many actions of this type – the risk of loss for investors may also be higher, with more volatility of bonds. In short, they are stocks that offer greater potential return, but also greater risk to investors. Read more: Is investing in stocks in your plans? Check the basics
Value stocks are securities of typically larger and more well-established companies that are trading below the price that analysts consider fair. Ie, stocks that are “cheap”, with low valuations in relation to their earnings and long-term growth potential. These companies do not have a history of rapid growth, but rather more stable and predictable business models that generate modest gains in revenue and profits over time. Generally pay dividends, that is, they distribute part of the profits to the shareholders. The idea behind this strategy is that solid companies, with consistent results, will eventually see their value recognized by the market and reach their appreciation potential, regardless of the reason that led them to being “undervalued” at that moment – negative news about the company’s president, or a reaction to disappointing results in a certain period, for example. Of course, there is a risk that the stock will not go up as expected, as well as that the recovery will be slow. We find this type of stock in more traditional sectors, such as banking.Despite the differences, the categories are not “closed” concepts, there are multiple companies with characteristics of both: for example, with low valuations and, at the same time, a growth potential above the sector or market average. , more important than categorizing the actions, it is know the company in which you will invest and take into account a number of financial aspects in order to determine its potential. Not always a stock that looks cheap is, in fact, cheap.. That’s what we’ll see next. Read more: Want to invest in the stock market? 7 basic care to take into account
How do you know if a stock is “cheap” or “expensive”?
To assess whether a particular stock is undervalued, or cheap, don’t just look at the quote. A share that costs 0.5 euros is not necessarily cheap, just as a share that costs 500 euros is not necessarily expensive. So how do you know? There are a series of ratios that relate the price of the security with indicators such as profits and the company’s own assets, and which allow the price of that security to be evaluated. One of the most relevant is the “Price Earnings Ratio” (PER), which relates the current price to earnings per share (that is, earnings divided by the number of shares in the company). It is this ratio that allows you to assess whether the company is cheap or, on the contrary, expensive, taking into account the profits that this listed company presents. The lower the ratio in relation to the sector, the “cheaper” is, theoretically, the stock. However, it is important to analyze other ratios, such as the one that relates the company’s capitalization to the value of its assets. (“Price to Book Value”), or debt to EBITDA, to get a better understanding of the financial health of the company you are investing in. When we say that growth stocks typically trade at high multiples, in practice we mean that their key ratios are high. In value stocks, the opposite happens. Read also: Fundamental analysis of stocks: What does it consist of and how it helps to invest
Which is the best strategy: growth or value?
Both strategies can offer good investment opportunities. The choice of stocks should depend, above all, on the investor’s preferences and characteristics and on his/her financial objectives. And the portfolio should be as diversified as possible: having actions of both types can generate more positive results and protect you better from risks. Growth stocks tend to behave better during periods of economic expansion, when interest rates are low and corporate earnings are rising. The value actionson the contrary, tend to outperform the others in times of economic slowdown or contraction, interest rate hikes and greater pessimism in the market. In a simplified way, we can say that the strategy of investing in growth suits you better if:- you are not worried about receiving dividends. As we have seen, these companies prefer to invest profits in their expansion rather than remunerating shareholders; – he is willing to wait. Companies can take some time to reach their potential and consolidate, so the The investor’s time horizon should be extended;- has tolerance for volatility. O The price of these shares can suffer great fluctuationsdepending on the evolution of the future perspectives for the business;- trusts in its ability to choose “winners”. Many of the growth stocks are in emerging, fast-growing and highly competitive industries. You have to look at the sector and try to make the right choices. On the contrary, hunting for “value” may be more suitable if:- you want to receive dividends. These companies usually distribute part of the profits to the shareholders, so you will receive a regular return on your investment; – stability is preferred. THE price of these securities tends to be more stable, as long as the business remains as expected; – it has a shorter time horizon. Value stocks can recover fairly quickly from a bad moment and ensure gains for investors; – is confident in the ability to analyze the strength of the company. Cheap stocks are not necessarily a good deal. They are often companies that have lost their competitiveness and have little chance of recovering in the future. Also read: 12 golden rules for investing in the stock market Tags #stocks, #stock exchange, #investments, #investing in the stock market