Iris Goode-Middleton

MBA 570

Growth Stock and Value Stocks

March 21, 2015

Purchasing stock makes investors part owners in the corporation. The stock purchased is an equity investment in the company. This makes the owner of the stock entitled to returns on their investment. When making stock investment decisions, there are two main stock types to consider investing in called value stocks and growth stocks. The goal of both stock types is to gain the best returns possible. However, they differ in characteristics.
Value stock is defined as, a stock that tends to trade at a lower price relative to its fundamentals and thus considered undervalued by a value investor. Common characteristics of such stock include a high dividend yield, low price-to-book ratio and/or low price to earnings ratio (Investopedia, 2015, para. 1). Value stock investors are looking for stocks that are not reflecting their fundamental worth. The reasons for the stock being undervalued can be many. A company’s stock can be undervalue because it is experiences difficulties, its industry can be in decline or it can have a period of poor quarterly earnings. These are a few of the reasons why the stock can be undervalued.
In general, value funds focus on perceived safety rather than growth, often investing in mature companies that are primarily using their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, although the also offer the potential for long-term appreciation if the market recognizes the true value of the stocks in which they invest (Fidelity, n. d., para. 5). Growth stocks differ from value stocks rather starkly. Investopedia defines growth stocks as, “shares in a company whose earnings are expected to grow at an above-average rate relative to the market” (n.d., para. 1).