There are several ways to make money in the stock market, from short term trading strategies to long-term investing in value or growth stocks.
When deciding to buy stocks when they’re value is low to later sell them when their value is high, and therefore achieve capital gains, you’ll have to decide whether to go for growth stocks, value stocks or a mix of both.
Growth stocks are those that are expected to outperform the overall market over time because of their future potential.
Value stocks are those that are currently trading below their real worth and should therefore normalize over time.
Growth Stocks (Seed for the future)
Growth stocks are expected to grow faster than competitors because of their ability to innovate or due to their good management team.
These stocks tend to reinvest their earnings to fuel growth initiatives that will set them apart from the rest. As such, these stocks don’t usually pay dividends.
While growth stocks offer higher upside potential, they are also inherently riskier when compared to value stocks. There’s no guarantee a company’s investments in growth will be fulfilled.
Growth stocks are usually priced high relative to their profits (P/E) given the high expectations from investors of future growth.
These stocks also tend to experience price swings in greater magnitude when compared to others, so they may be best suited for risk-tolerant investors with a longer time horizon.
Value Stocks (Diamond in the rough)
Value stocks have prices that don’t necessarily reflect their true worth. Like buying a pair of jeans on discount, value stocks are considered bargains. With time, the market will properly recognize the company’s value and the share price will rise.
These stocks are undervalued for a variety of reasons, such as negative PR or bad earnings, but eventually gain back value in the long term. While these stocks may target growth, they don’t necessarily reinvest a big portion of their earnings to fuel growth. Hence they might also give out dividends.
Value stocks tend to have more limited upside potential and be less risky than growth stocks.
Value stocks are usually priced low relative to their profits (P/E) because they are undervalued. They are expected to gain value eventually when the market corrects their prices.
Regarding of the approach you will choose, value, growth or mix of both. We recommend investing for the long term and investing regularly