Growth And Value Investing – Which Is Right For You?

by Leon on March 6, 2013

what is growth and value investingThe world of investing is vast, and it holds a level of complexity that many beginning investors greatly underestimate. It’s possible to make a fortune through smart investment, but it’s even easier to lose that fortune on one wrong call. Two competing schools of thought in the investing world, growth and value investing, each hold the potential for large returns. However, deciding which of these different kinds of investment is right for you is not always as simple as it may seem. There are benefits and downfalls with either approach to investing, and making the most of your dollar requires careful planning and deep understanding of both.

According to value investing, the best way to make your money work for you is to buy stocks that trade lower than their true value. Investors who subscribe to this mode of thinking seek out stocks that they believe the market has assigned inappropriately low values. Due to the emotional nature of many markets, a single piece of good or bad news can change the price of a given stock to a figure that is less than its actual worth. Value investors read the market carefully to determine which stocks are trading for less than their intrinsic value, and they make a profit by selling when these stocks inflate in price once again.

Investing according to growth, on the other hand, involves choosing stocks that grow faster than others. A growth investor will look for shining opportunities in stocks that are cheap today, but will skyrocket in price as their companies begin to grow. For this reason, most growth investors are particularly interested in start-ups and young companies. The technology industry is especially attractive to growth investors due to the rapid increase in profits that tech companies tend to experience. Growth investors profit solely from the capital gains of the companies in which they invest.

Each of these kinds of investing has its obvious benefits, and they subscribe to a common investing principle–buy low, and sell high. The difference lies in the motivation behind stock purchasing. Where a value investor seeks out companies that are being undervalued in the market, a growth investor will choose to buy stocks of companies that are not yet fully developed. The problems with these kinds of investing, however, are important to note. Value investing requires a great deal of market awareness, and relies largely on intuition to gauge the true value of stocks. Growth investors, on the other hand, are charged with the difficult task of predicting the future of a young company.

Which of these types of investing will best suit you all depends on your unique strengths. Neither school of thought is better than the other. Investors who stayed tuned into price fluctuations and click here and there for hours on end to get the latest market news may find their fortune in value investing. Experienced investors who are adept at predicting the profitability of companies and reading into public demand may be more suited to growth investment. Whatever path you choose, be sure to fully understand the strengths and weaknesses of each kind of investing, and choose according to your own strengths and weaknesses.

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