Value investing vs. growth investing: What’s the difference?
Editorial staff, J.P. Morgan Wealth Management
- Value investing and growth investing are two approaches you can take when buying stocks (shares of a company).
- Value investing focuses on companies that may be selling at a discount to what you believe they’re fundamentally worth. Growth investing concentrates on companies that increase their earnings at a faster rate than their peers. These companies are often in faster-growing or more innovative industries.
- 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.
If you’re unclear about the difference between value investing and growth investing, here’s how to think about these approaches.
What is value investing?
A value investing approach focuses on identifying companies that are selling at a discount to their intrinsic value (what you believe they’re worth). 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 in the stock. You should also consider what would need to happen for the stock’s price to eventually rise to or exceed your estimate of its fair value. This potential trigger is often called a catalyst – a new CEO is named, product quality issues are resolved or earnings stabilize, for instance.
Historically, periods when value stocks provide a return above that of the broader market are sometimes referred to as the “value premium.” Many exchange-traded funds (ETFs) and mutual funds are designed to try to capture that premium in a low-cost way.
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What is growth investing?
A growth investing approach focuses on companies that increase their earnings at a faster rate relative to their peers. These companies are often found in innovative or fast-changing parts of the market that generate a lot of buzz and excitement. Similar to that state-of-the-art smartphone, however, stocks in these areas may trade at higher valuations than their competitors.
As a company’s earnings grow, earnings per share (EPS) typically rises, 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, valuations typically reflect optimistic expectations, so that leaves a lot of room for uncertainty. Historically, periods when growth stocks provide a return above that of the broader market are sometimes referred to as the “growth premium.” Similar to value investing strategies, many ETFs and mutual funds are designed to try to capture that premium in a low-cost way.
Value vs. growth investing: key differences
Value investing | Growth investing |
|---|---|
Strategy | |
Value investing focuses on identifying undervalued assets, such as stocks or other financial instruments, and buying 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 often benefits from 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-valuation 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. |
The bottom line
An important consideration with 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 visit a Chase branch.
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Editorial staff, J.P. Morgan Wealth Management
