Of the many investment terms that are thrown around with little explanation for the typical investor, growth and value stocks tend to be the most misunderstood and confusing. Like many facets of investing, however, the terms growth and value aren’t necessarily as confounding as they might initially sound.
Growth and Value Basics
In a nutshell, both terms indicate where a particular stock might be trading relative to certain underlying fundamentals and perceptions. Although there can be some slight variance in definition between different investment firms, publications, or commentators, growth and value are two separate approaches to equity investing that focus on projected appreciation in the case of growth positions or purchasing undervalued stocks in a value-oriented approach.
When a stock displays strong earnings and investors project healthy future appreciation prospects, that stock is considered a growth equity. Growth investing relies on the traditional notion of purchasing a stock or group of stocks that will grow well in the future by displaying consistent and solid fundamentals like earnings-per-share.
Alternatively, value investing looks for stocks that appear to be undervalued by the markets with respect to their fundamentals. Think of value stocks as being on sale for a certain amount of time and can be purchased at bargain prices that will benefit your portfolio once prices start catching up with fundamentals.
While certain stocks can be defined as either growth or value for extended amounts of time, no single position will ever be permanently categorized as either. In other words, while a particular stock might be considered value today, it could very likely be a growth stock just a few years down the road.
Which Is Right for Me?
The differences between growth and value investing don’t necessarily make one right or wrong for you and your investing strategy. Instead, like any other form of investing or investments, both can play an important role to your portfolio. In fact, simply from a diversification perspective, holding both growth and value stocks in your asset allocation can help minimize the impact of volatility over the long run.
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.