We hear it all the time: I want to learn more about stocks so I can invest (or be more comfortable making investment decisions). Investing in the markets will always remain an intriguing place to build wealth, especially as technology advances; information becomes more readily available, and investors can get in on the action with a relatively small amount of money.

A key concept of those interested in stock investing should understand, though, among many other key terms and concepts, is the fundamental difference between a growth and value stock.

When researching investments, growth investors look for stocks that forecast growth at a high rate for a relatively brief time or some form of fund, for example, mutual fund, index fund, or ETF that focuses on growth stocks. Conversely, value investors look for stocks that appear to be undervalued and are expected to rise to their “true” value over a longer time horizon.

Growth Fundamentals

Growth investors look for companies that show consistent earnings and sales growth over, say, three to five years. Typically, the companies represented by these kinds of stocks are found in rapidly expanding industries. Perhaps these companies have a niche product or service or a well-known brand name, coupled with solid finances and strong management. Other attributes might be superior profit margins in their industry and generally high return on shareholder equity. However, a key thing to note is that these companies seldom pay dividends; rather, they reinvest earnings back into the company, continually promoting business growth.

Things to keep an eye on with growth stocks are their share price (found by researching the company's ticker symbol) and earnings (located on its income statement). Generally, the earnings growth rate is the more important of the two for growth stock investors. The earnings growth rate is when profits grow from year to year; consistency is another key metric to watch.

Another key indicator for growth investors is stock price relative to earnings, or the price-to-earnings (P/E) ratio. An often-quoted statistic, the P/E ratio, which divides the current share price by a company's earnings estimate, represents what the market is willing to pay for a share of the company's earnings. A growth investor may be willing to buy a company with a high P/E ratio if it meets other guidelines.

Value Investing: Key Indicators

Unlike growth investors, value investors often buy stocks with a P/E ratio substantially below the general market, the relevant industry, and the earnings growth rate. They seek out companies cheaper than their book value. Book value is the difference between a company's assets and its liabilities. In theory, it's the value of the company portion represented by a share of stock. Book value divided by the current market price, or price-to-book, shows what multiple the market is willing to pay for a portion of the company's assets.

A high dividend yield is also important to value investors. Since dividends are a large part of a stock market's long-term total return, a stock with a higher yield will give a value investor an edge. Ultimately, a value investor expects a stock price to rise to its "true" value—a predetermined target forecasted through research. When the target or "forecasted" value is reached, a value investor might sell the stock or look for another discounted stock in the marketplace.

What's your investment style?

While some investors favor growth, others favor value investing; there is nothing wrong with using both in your investment strategy. As we've said before, the best strategies for your situation depend on your risk tolerance, time horizon, and investment objectives.

Let's connect to discuss how ClearVue can help design a portfolio that aligns with your goals.

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