Break it down: Value vs. growth investing
Editorial staff, J.P. Morgan Wealth Management
- Value and growth investing are two approaches you can take when buying stock in a company.
- Value investing focuses on companies that may be selling at a discount because most other investors think the shares are worth less. Growth investing concentrates on companies that increase their earnings at a faster rate than their peers. These companies tend to be newer, more innovative businesses.
- Before you buy a mutual fund or exchange-traded fund (ETF) that invests in value or growth stocks, understand how that fund defines these terms specifically.
If you’re unclear about the difference between “value investing” and “growth investing,” here’s how to think about these approaches:
Value investing | Growth investing |
|---|---|
Strategy | |
Value investing focuses on identifying undervalued assets, such as stocks or other financial instruments, and trading them at a discount often due to leadership changes, quality concerns or an earnings decline. Ideally, these assets will rebound to reflect their intrinsic value. | Growth investing focuses on companies with a higher rate of earnings growth compared to their peers, often in innovative or rapidly evolving sectors. |
Risks | |
Successful value investment requires an effective catalyst to drive stock prices up such as a new, innovative product launch or a major change in company management. Thus, value investment involves determining whether the discount adequately compensates for the risk. | Growth investment may entail higher risk due to reliance on continuous growth and high valuations. Companies may fail to meet these higher growth expectations, therefore delivering lower returns. |
Costs | |
Value investing typically involves lower valuation stocks, meaning potentially lower upfront costs. | Growth investing generally focuses on higher-priced stocks, potentially leading to higher initial investment requirements. |
Market dynamics | |
Value investing aims to earn a “value premium,” outperforming the market when undervalued stocks appreciate. | Growth investing seeks a “growth premium,” where high-performing stocks exceed general market performance. |
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What is value investing?
A value investing approach focuses on identifying companies that are selling at a discount because most other investors think the shares are worth less. But just like that used bike you got on sale, there are usually reasons why a security is undervalued: perhaps a recent CEO departure, product quality issues or even a decline in company earnings.
The key to value investing is determining whether you are receiving an adequate discount for the risk you’re taking on the stock. You should also consider what would need to happen for the stock’s price to eventually rise to or exceed what you think is the stock’s fair value. This event is known as a catalyst – a new CEO is named, product quality issues are resolved or earnings stabilize, for instance.
When value investing provides a return above that of the broader market, this is known as a “value premium.” Many exchange-traded funds (ETFs) and index mutual funds are designed to try to capture that premium in a low-cost way.
What is growth investing?
A growth investing approach focuses on companies that increase their earnings at a faster rate relative to their peers. These tend to be some of the newer, more innovative sectors of the market that generate a lot of buzz and excitement. Similar to that state-of-the-art smart phone, however, stocks in these areas may be more expensive than their competitors.
As a company’s earnings grow, the earnings per share also grows, which may drive the share price higher. Due to their higher valuations and dependence on continued growth, these stocks may be riskier and more prone to significant price changes.
When thinking about growth investing, it’s important to ask yourself: Am I overpaying for this stock? For many growth companies, the high valuations are typically based on high expectations, so that leaves a lot of room for uncertainty. When growth investing provides a return above that of the broader market, this is known as a “growth premium.” Similar to value investing strategies, many ETFs and index mutual funds are designed to try to capture that premium in a low-cost way.
Are there other considerations?
An important consideration around value and growth investment styles is that not every investment fund will use the same definition of “undervalued” or “strong growth” in its approach. Be sure you know how a fund defines these terms before you invest by reviewing the prospectus.
If you want to explore more yourself, check out J.P. Morgan Self-Directed Investing. If you would prefer to work with a J.P. Morgan Advisor, reach out or stop into one of our Chase branches.
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Editorial staff, J.P. Morgan Wealth Management
