VALUE, GROWTH OR INCOME
When it comes to stock market investing, most investors sit in one of three camps: growth, value, or income. While income investors mainly focus on generating passive income through dividends caring less about the short or medium term stock price behaviour, growth and value philosophies are quite different. Because each philosophy is different we encourage you to find the philosophy that works best for you or even better combine the elements of different ones to create one unique to your situation and expectation.
Value investing follows the hard rule of buy low, sell high. In this philosophy the term “low” is at times relative to how much the investor deems the stock to be worth.
Value investors are always looking for stocks they think are undervalued. Value stocks in most cases are stocks that have recently experienced a rough period resulting in price drops, and have therefore become a ‘bargain’. The three most common reasons for such price drops are: a) The market overreacted to bad news, b) The stock belongs to an ‘out-of-favour’ industry and very few are interested to invest there, c) The stock is too small (market capitalisation) with very little analytic research on it and is therefore neglected by the market
The growth method of investing may be characterised as the optimist’s philosophy: “buy high and sell higher”.
Growth investors look for exceptional companies that will grow substantially and therefore outperform the market and generate higher returns. Tech companies are often the darlings of growth investors. As growth companies mostly reinvest their profits to finance further expansion, they do not pay dividends and investors look for capital gain instead.
Once a company has gained a lot of market share and has somewhat matured it often starts to pay out dividends as the need for financing further expansion/growth is limited. In this stage it becomes, what is called an income stock. Investors looking for income stocks are not trying to find a stock at a bargain price but rather want to generate a steady dividend income (sometimes as an alternative to a bond portfolio) without negative surprises.
Whether you are a value, growth or income investor, when it comes to putting your investment strategy together, it is smart when you combine the strategies of experts with different philosophies.