Value vs Growth Stocks
Generally speaking, value stocks are shares of companies that have fallen out of favor and are valued less than their actual worth. Growth stocks are shares of companies that demonstrate a strong potential to increase earnings, thereby ramping up their stock price.
The terms value and growth refer to two categories of stocks, as well as two contrasting investment “styles”: value can be lower risk with a focus on longer-term returns; growth can be higher risk, with a focus on higher, short-term returns.
Each style has pros and cons. When value investing, investors can buy shares (or fractional shares) of a company that has strong fundamentals at bargain prices. However, investors must be careful not to fall into a “value trap”: i.e., buying stocks that appear to be a bargain, but are actually trading at a discount due to poor fundamentals.
Key Points
• Value stocks represent undervalued assets, while growth stocks indicate potential for significant price increases.
• Established companies may offer value stocks, whereas growth stocks usually stem from emerging, rapidly expanding businesses.
• Dividends are more common with value stocks, as growth stocks frequently retain earnings for reinvestment.
• Long-term gains are the focus of value investing, contrasting with the short-term appreciation sought in growth investing.
• Volatility tends to be lower in value stocks and higher in growth stocks, reflecting different risk profiles.
What Are Value Stocks?
Value stocks are stocks that tend to be relatively cheap, or that investors believe aren’t receiving a fair market valuation. In other words, investors think that a stock may be undervalued by the market. Value investors try to identify value stocks by examining quarterly and annual financial statements and comparing what they see to the price the stock is getting on the market.
Investors will also look at a number of valuation metrics to determine whether the stock is lower cost relative to its own trading history, its industry, and other benchmarks, such as the S&P 500 index.
Key Characteristics of Value Stocks
Value stocks tend to have a few underlying characteristics that may lead investors to believe that they’re undervalued.
For example, investors often look at price-to-earnings (P/E) ratio, which is the ratio of price per share over earnings per share. Some experts say that a value stock’s P/E should be 40% less than the stock’s highest P/E in the previous five years.
Investors may also look at price-to-book, which is the price per share over book value per share. A stock’s book value is a company’s total assets minus its liability and provides an estimate of a company’s value if it were liquidated.
Value investors are hoping to buy a quality stock when its price is in a temporary lull, holding it until the stock market corrects and the stock price goes up to a point that better reflects the underlying value of the company.
What Could Make a Stock Undervalued?
There are a number of reasons that a stock could be undervalued.
• A stock could be cyclical, meaning it’s tied to the movements of the market. While the company itself might be strong, market fluctuations may temporarily cause its price to dip.
• An entire sector of the market could be out of favor, causing the price of a specific stock to dip. For example, a pharmaceutical company with an effective new drug might be priced low if the health care sector is generally on the outs with investors.
• Bad press or a negative news cycle could cause share prices to drop.
• Companies can simply be overlooked by investors looking in a different direction.
Examples of Well-Known Value Stocks
As of early 2025, here are five examples of top-performing value stocks, according to Morningstar. But remember, there’s no guarantee that any of these stocks, or any stock for that matter, will appreciate.
• Walmart
• International Business Machines (IBM)
What Are Growth Stocks?
Growth stocks are shares of companies that demonstrate the potential for high earnings or sales. These companies tend to reinvest their earnings back into their business to spur their company’s growth, as opposed to paying out dividends to shareholders.
Growth investors are betting that a company which is growing fast now, will continue to grow quickly in the future. But the risk is that investors jumping into growth stocks may be buying a stock that is already valued relatively high. In doing so, they could lose a potentially significant amount of money if prices to tumble in the future.
Key Characteristics of Growth Stocks
To spot growth stocks, investors can look for companies that are not only expanding rapidly but may be leaders in their industry. For example, a company may have developed a new technology that gives it a competitive edge over similar companies.
There are also a number of metrics growth investors could examine to help them identify growth stocks. First, investors may look at price-to-sales (P/S), or price per share over sales per share. Not all growth companies are profitable, and P/S allows investors to see how quickly a company is expanding without factoring in its costs.
Investors may also look at price-to-earnings growth (PEG), which is P/E over projected earnings growth. A PEG of 1 or more typically suggests that investors are overvaluing a stock, while PEG of less than one may mean the stock is relatively cheap. PEG is a useful metric for investors who want to consider both value and growth investing.
Key Differences Between Value and Growth Stocks
The main difference between value and growth stocks mostly concerns their current valuation. As discussed, investors believe that value stocks are undervalued at a certain point in time, and believe the stock could appreciate over time.
Growth stocks, on the other hand, may not be undervalued, but are expected to appreciate relatively quickly over the short or medium term.
With that in mind, some other differences between the two could include relative risk; value stocks may be less risky than growth stocks, which can be more volatile. Further, value stocks may be shares of older more established companies, which could also offer dividends (but have lower earnings growth). The opposite might be true for growth stocks.
Performance in Bull vs. Bear Markets
Given relative risk factors and volatility in relation to growth and value stocks, investors might expect that value stocks would perform better than growth stocks during bear markets. The inverse could be true for bull markets. But again, nothing is guaranteed.
Investment Horizon for Value vs Growth
Investors may also want to consider their strategy and time horizon when deciding whether a value or a growth strategy makes more sense for them.
Specifically, value stocks may be better suited for investors with long-term strategies, while growth may be better for those with shorter time horizons. Naturally, a mix of the two, to some degree, is likely an ideal route for most investors, but it may be worth speaking with a financial professional for guidance.
How Are Growth and Value Strategies Similar?
While growth and value investing are two different investment strategies, distinctions between the two are not hard and fast; there can be quite a bit of overlap. Investors may see that stocks listed in a growth fund are also listed in a value fund depending on the criteria used to choose the stock.
What’s more, growth stocks may evolve into value stocks, and value stocks can become growth stocks. For example, say a small technology company develops a new product that attracts a lot of investor attention. It might start to use that capital to grow its business more quickly, shifting from value to growth.
Investors practicing growth and value strategies also have the same end goal in mind: They want to buy stocks when they are relatively cheap and sell them again when prices have gone up. Value investors are simply looking to do this with companies that are already on solid financial footing, and hopefully, see stock price appreciation should rise as a result.
Growth investors are looking for companies with a lot of growth potential, whose stock price will hopefully rise quickly.
Using Growth and Value Strategies Together
The stock market goes through natural cycles during which either growth or value stocks will be up. Investors who want to capture the potential benefits of each may choose to employ both strategies over the long term. Doing so may add diversity to an investor’s portfolio and head off the temptation to chase trends if one style pulls ahead of the other.
Investors who don’t want to analyze individual stocks for growth or value potential can access these strategies through growth or value mutual funds. Because of the cyclical nature of growth and value investing, investors may want to keep a close eye on their portfolios to ensure they stay balanced — and consider rebalancing their portfolio if market cycles shift their asset allocation.
Balancing Risk With Growth and Value Investments
As noted, it may be a good strategy to find some sort of balance between value and growth assets in your portfolio. This adds a degree of diversification, naturally, but given your personal risk tolerance and time horizon, there may be advantages to balancing your portfolio more toward growth or value — it’ll depend on your specific situation.
Again, this may be worth a conversation with a financial professional, who can help with some additional guidance. But given prevailing, changing market conditions and more variables, it can also be a good idea to regularly check in and rebalance your portfolio.
The Takeaway
Growth and value are different strategies for investing in stocks. Investing in growth stocks is considered a bit riskier, though it also may provide potentially higher returns than value investing. That said, growth stocks have not always outperformed value stocks. Value stocks may be purchased for less than they’re worth, tend to be lower risk, and may offer investors some appreciation over time.
As a result, some investors may choose to build a diversified portfolio that includes each style so they have a better chance of reaping benefits when one is outperforming the other.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What is the main difference between value and growth stocks?
Value stocks are considered to be undervalued by investors, whereas growth stocks have an expectation of short-term growth or appreciation.
Can growth stocks turn into value stocks over time?
Yes, growth stocks may turn into value stocks over time, and value stocks may turn into growth stocks. They are fluid, in that sense.
How can beginners balance growth and value investments?
Perhaps the easiest way for beginners to balance growth and value investments is to diversify their portfolios through index or mutual funds, which may include a mix of both types of investments.
Which strategy works better in a recession?
While nothing is guaranteed or for certain, it may be a better bet to stick to a value strategy during a recession or economic downturn, as value stocks tend to have less volatility and risk than growth stocks.
How do dividends impact value and growth stocks?
Many growth stocks may not offer dividends, as those companies may instead be focused on growth and reinvesting their profits. Value stocks, on the other hand, tend to offer dividends, as they’re not necessarily in “growth mode,” and are in the practice of returning value to shareholders.
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