Growth vs. Value vs. Income Stocks
Knowing how to spot the differences between the three can help you build a better portfolio.
There are different strategies investors can use when it comes to the stock market. Below, we take a look the three categories of stocks to help you formulate your own. Knowing how to spot the differences between the three can help you build a better portfolio.
Growth stocks are usually companies experiencing rapid growth at an above-average pace. Most of their revenue is then reinvested in the company to fuel that growth. The price-to-earnings ratio is usually very high, meaning the stock prices are high compared to their earnings per share. Investors seek out growth stocks because they expect returns in the form of stock price increase in the near future. As revenue is reinvested, dividends are not usually paid out.
A value stock is a company that seems to be undervalued in the market, even though the company has a strong financial status. The market has a negative sentiment about the company that is not usually related to their financial strength. Value stocks, generally, have low price-to-earnings ratio and investors buy them at bargain prices in the hopes that it will increase in value.
These stocks are stable but provide a high dividend yield. For example, utility stocks are know to pay competitive dividends. In addition, preferred stocks are another source of income stocks. Although these stocks are less risky and pay frequent dividends, their return will likely be lower than value and growth stocks.