Growth Investing vs Value Investing

Before getting any deeper on stock investing, you must realize that there are styles of stock investing - growth investing and value investing.

Value Investing
Value investing is the strategy of selecting stocks that trade for less than what they are really worth. Value investors keep looking for stocks that are under priced but have excellent financial record. This information can be obtained by looking at the financial statements (balance sheet, income statement). Value investors typically take into consideration attributes like low price to earnings ratio (P/E), price to book ratio (P/B), price to sales ratio (P/S) and high dividend yields. In short, value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

Growth Investing
Growth investing works exactly opposite to that of value investing. Growth investors focus on stocks with faster growth potential. Growth investing is the strategy of selecting stocks that show signs of faster growth. Growth investors keep looking for stocks that will grow faster compared to its industry or the overall market. Growth investors focus on stocks trading at high P/E, P/B and P/S ratio and do not care much about dividend yields. In short, growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Value versus Growth
Value investors generally plan to hold the stock for a longer duration, since they believe over a period the stock will come out with flying colors. Value investors are generally patient investors. Warren Buffet is well known for value investing. On the other hand, growth investors believe that soon the company will grow rapidly and so will its stock price. Growth investors are generally in for short time frame compared to value investors. George Soros is well known for growth investing. In general, value stocks tend to hold up better during stock market downturns.