When it comes to stock selection, there are a lot of ways to do it. There are thousands of listed companies in India, and selecting the best companies is not so easy. You may be confused about which stocks to invest in from all the available options. If so, the first thing you can do is select the stock category. It will significantly bring down the number and help you make a wise decision.
In this article, we will talk about the two popular categories – value and growth stocks. We will also look at which of the two categories you should select for investing.
Growth stocks – A growth stock is one that grows at a fast rate compared to the industry average and its peers. The growth of stock is measured in terms of revenue and profits. For a growth company, these parameters can be 3X to 5X for the last three to five years. In some cases, the growth is measured in terms of how fast the company is acquiring customers or increasing its market share.
YYou may see growth stock with PE higher than 100 and at a very high valuation. They grow at an average rate of 18%, while other NIFTY companies grow at 8%. Examples of growth stocks are Dmart, Adani Enterprises, Eicher Motors, etc.
Understand risks before investing in growth stocks or get in touch with a company that provides investment advisory services so you pick only the best growth stocks,
Value Stocks – Value stocks do not have a very high growth rate and are available at a low valuation and low market price. These are companies that are available below their true potential, and the intrinsic value is higher than the current stock price.
You invest in such stocks because you know at some point, the stock price will rise to its intrinsic value and give you good returns. There are a number of ways to determine value stocks, but we won’t go into details of the same. If you want to understand value investing further, you should read Benjamin Graham’s book – The Intelligent Investor. A few examples of value stocks are ITC, Aurobindo, Hero Motocorp, etc.
A stock advisory company can help you determine which value stocks, among all, can give you the best returns.
Which category of stock you should pick depends on your investing preferences and financial goals. Let us try to make it simple for you by highlighting the attractive points of both. You can prefer investment in growth stocks in the below scenarios –
You are not looking for dividend income – Most growth companies pay little or no dividends as they want to reuse the available cash. They reinvest the available capital (profit) in the business for faster growth.
You are comfortable with price movement – The price of a growth stock is sensitive to changes in the company’s prospects. When the company performs better than the expectation, the stock price soars. When a company fails to meet expectations, the stock price can fall significantly.
You are ready to invest for the long term – We mentioned above, the stock price soars, but there are setbacks in the journey. It takes time for the company to stabilize and realize its full potential. You should be ready to stay invested for long.
You are confident you can pick the ONE – There are many growth stocks in the market, and not every company will cross the winning line. Some of them may stop in between, and hence only when you have the knowledge and correct tools to pick the growth stocks, you should invest in them.
You can look for value stocks if your goals are in line with the below points.
You are looking for regular income – VValue stocks pay a substantial amount of cash to you as dividends. Such companies have limited growth options. Hence to make shares attractive, they give regular dividend payouts to investors.
You want a stable share price – Value stocks do not show significant price movement as their business conditions remain within predictable ranges. You can opt for them if you do not want much fluctuation in your portfolio.
You can differentiate between value and cheap stock – We mentioned above, value stock prices are low. However, you should know to distinguish between a value stock and a cheap stock. The stock price can become low because it may have lost its competitive edge or lost significant market share.
Your investment horizon is less -If you want to stay invested for less time and don’t want to see your portfolio at a loss, you can prefer value stock.
Which one is the winner?
There is certainly no clear winner between the two. Both are completely different and help different sets of investors meet their financial goals. When the economic condition is good, or the market is bullish (like the present scenario), the growth stocks outperform value stocks. During difficult times, value stocks perform better than growth stocks.
You will hear a lot of debate where investors pick one of two. However, there is no reason that you can’t select both of them in your portfolio. With a risk management process in place, you can create a balance between the two categories.
As you have seen above, each category has some attractive qualities, and with a mix of both, you will be able to create a balanced and diversified portfolio. If you are new to investing and unsure which value and growth stocks to pick, you can leave that to investment advisory services.
It is an AI-driven platform that creates a portfolio based on your risk profile and investment horizon. It is an excellent platform for novice and experienced investors looking to remove the emotional angle from investing. Check out our app for more details.