Value investing & growth investing are two approaches to investing that are considered by the investors in making investments. Each one has its own characteristics and advantages. The investors which are interested in value investing are referred as value investors while the other ones are considered as growth investors.
Value Investing Strategy
Value investor considers the purchase of certain stock of company only when fundamental analysis conducted justifies that purchase in spite of the fact that the considerations of fundamental analysis are apparently inconsistent with the view of the entire marketplace. Certain financial ratios of the company are considered like return on equity ratio, price to book ratio and return on assets ratio etc. There are certain analysts who tried to ascertain earnings growth within specified industry and many of evaluated results have low growth rates. Such companies are struggled to identify whose growth in the industry is above-average. The value investor patiently waits to obtain the fruitful results from his research. Mostly value investor considers those new corporate ventures that are based on the firm ideas and experienced management. They do not prefer to apply bandwagon approach to investing or considering the pie-in-the-sky ideas.
The value investors also consider regression to mean approach. They believe that the expected returns of the securities are long term in nature with certain level of risk connected with them. For example an individual lives in a region where there is 58% annual average temperature. If the existing temperature is 74%, then the individual predict that the temperature will decline over the next few months if no other information in regard is available. Similarly if the current temperature is 26%, then the resultant long term anticipation is the rising of temperature. Value investors use the same logic in their company analysis about the prices of stocks and the linked returns. When the return of a stock is below from its long term expected level, it is the anticipation that the stock price will be adjust in such a way in the future that the returns will rise resultantly. On the similar way when extraordinary returns are offered then they will probably adjust in the future according to the average long term returns against the connected level of risk.
This fact is defined in a different way that when a security performs extraordinarily well for sometime but that over-performance is adjusted will probably be adjusted in future time when the security performs below expectations. The useful technique is to buy that security which is offering return below than long term average return. In a similar way the security whose performance is above the long run expected rate of return is better to sold.
Growth Investing Strategy
The term growth in investment is referred to two things which are investment objective and the investment style. In the approach of growth investment, the investor searches the companies that are offering steady growth for investments. It further includes the two factors
- The Information Trader
- True Growth Investor
The information Trader
The information trader is in hurry and wants immediate profits. He considers that processing news better than the other persons is the formula for making quick profit. Also he considers that the marketplace is characterized by information differentials. This means that better information is available to some people while others have not such access. Also some individuals process the available information in a better way as compared to other individuals. In fact the information trader believes that analyzing the complete information in an effective manner than other persons will ensures the above-average profits.
The True Growth Investor
The true growth investor is not in hurry and has potential to wait. But he thinks that above-average returns can be earned by the good investment manager for his client. Those companies that are favored by the financial community currently are focused by the true growth trader. There is significant price rises for the companies like Microsoft, Intel and Gateway due to rapid growth of the home computers and information superhighway developments. In certain situation it is not clear to justify the high price of particular stock with certain level of associated earnings of the stock. The growth investors are interested in the future prospects of the stock so they are willing to pay more for it. In fact they are purchasing the future earnings that may or may not generate.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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