Growth vs. Value Stocks
We talked about why size matters in the Market Cap section, but it’s not all that matters. Another important metric used to analyze the stock market splits stocks into two groups: growth stocks and value stocks.
What Are Growth Stocks?
Companies with a very high growth rate are considered – not surprisingly – growth stocks. Sometimes these companies won’t show a profit, or maybe will even lose money, but the lack of profit can be deceptive. Fast-growing companies tend to reinvest profits into the company or funnel those profits into other business ventures to grow profits at an even faster rate. That’s why growth stocks typically don’t pay dividends to their shareholders.
Examples of growth stocks are Google, Apple, Facebook, Netflix, Home Depot, Uber, and Visa.
What Are Value Stocks?
When a company’s growth rate drops to a more modest level that’s sustainable over the long haul, its stock is considered value stock. Unlike growth stocks, many value stocks pay their shareholders dividends. Growth rates eventually level out at some point due to natural limits on the market for a company’s product or service.
For example, take electricity. The electric company can only sell so much electricity to you each month, and regardless of market conditions, you’re likely going to find a way to pay your electric bill. Thus electric companies provide stability to withstand any economic condition.
Examples of value stocks are Southern Co., AT&T, Pepsi, JP Morgan Chase, and Lockheed Martin.
Which Stocks Are Better?
So which is best – growth stocks or value stocks? In fact, both have merit in a diversified portfolio. A mix of growth and value stocks is an effective way to create a sturdy portfolio that can weather both upturns and downturns.