When trading stocks, it’s important to know the different types of security you can invest in to build a solid trading strategy. Value shares and growth shares are two of the most important types of stocks you need to be aware of when deciding which kind of company, you’re going to trade.
While a value stock represents a mature company, a growth stock usually reflects a growing company with strong growth prospects. You can take advantage of both types of stocks when share trading online. This could be via a traditional brokerage that provides ownership of the stocks you trade. Alternatively, providers like easyMarkets offer stock trading with contracts for difference, which allow you to take a position on price movements without needing to own the underlying stock. You just need to decide which one is best for your type of trading.
When looking for value stocks, a trader is looking for a security whose price is usually often undervalued by the market. To spot opportunities, a trader will need to determine the intrinsic value of a company, ignoring the market’s whims.
While many investors believe that calculating the intrinsic value of a company is hard, there are different affordable ways to determine the real value of a stock to be able to buy a stock at a discount. Discounted cash flow (DCF) analysis, analysis based on financial metrics like P/E ratio, and asset-based valuation are three of the most popular ways of calculating the intrinsic value of stocks.
When looking for growth stocks, an investor will usually target popular and large growing companies with strong earnings growth, which will ensure that the value of the related stock price keeps rising.
To pick growth stocks that will outpace their peers in terms of earnings and stock price valuation, you need to determine which companies are growing the fastest, and which companies have established a strong niche. You also need to look at companies with a strong leadership team, a promising growth market, a strong brand, an innovative idea, and/or high barriers to entry that will lead to profits.
Value vs Growth stocks
Usually, value stocks represent solid and robust companies that use the money they earn to distribute consistent (and rising) dividends, which provide more secure and regular revenues for investors. Growth stocks, on the other hand, tend to reinvest every dollar they make into their business growth.
While growth stocks might provide a higher potential return than value stock, they’re also riskier for investors, as this kind of stock tends to outperform the market during bullish markets and underperform during bearish markets. Moreover, growth values can sometimes be overvalued by the market, which can negatively impact the stock price at some point. Therefore, growth stocks are considered riskier than value stocks for investors and traders.
But in the end, it all comes down to your investment style and trading strategy. Ask yourself the right questions to determine which kind of stock will fit best in your trading. What are your trading goals? How long will you keep the stocks in your portfolio? What’s your risk tolerance? How much money should you start trading with? Which leverage level will you use? Please let us know in the comment section below.