Growth Stock vs. Value Stock
Growth investors look for companies with above-average earnings growth potential. Value investors look for shares that appear inexpensive relative to company fundamentals such as earnings.
🎬 Video Explanation
Exam Tip
Growth focuses on earnings growth potential. Value focuses on price relative to fundamentals. P/E and dividends are clues, and styles can overlap.
Growth Stock vs. Value Stock
Growth and value describe investment styles. A company can have strong earnings growth and still look inexpensive at the price investors are being asked to pay.
| Factor | Growth style | Value style |
|---|---|---|
| What investors look for | Above-average earnings growth potential | A share price that appears low relative to earnings or other fundamentals |
| Price-to-earnings (P/E) ratio | May be higher because buyers pay more for expected future growth | Often lower relative to comparable companies |
| Dividends | Often little or none as companies reinvest in the business | Some companies pay dividends, and others do not |
| What can go wrong | Earnings can fall short of the expectations reflected in the price | A low price can reflect genuine weakness in the business |
Example
Suppose two companies each earn $2 per share. At $40 per share, the first trades at 20 times earnings. At $24 per share, the second trades at 12 times earnings. The lower P/E may draw a value investor's attention. Whether the shares are undervalued depends on the outlook for the business and the quality of those earnings.
Series 6 Exam Alert
Growth and value can also describe an equity fund's investment objective. For a growth fund, look for a strategy focused on companies with earnings growth potential. For a value fund, look for a strategy focused on shares the manager believes are underpriced. Use the stated strategy and objectives to identify the style.
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Dividend
A dividend is a distribution of a portion of a company's earnings to shareholders, typically paid quarterly in cash or additional shares.
Market Capitalization
Market capitalization (market cap) is the total market value of a company's outstanding shares, calculated by multiplying the current stock price by the number of shares outstanding. It's used to classify companies as large-cap, mid-cap, or small-cap.
P/E Ratio (Price-to-Earnings)
The P/E ratio is a valuation metric comparing a company's stock price to its earnings per share, used to assess whether a stock is overvalued or undervalued relative to its earnings.
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