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Growth and value stock investing

TradingPub Admin | April 10, 2013

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If you want some basic stock trading education that can help you achieve your investment goals, a good subject to explore is investing in growth and value stocks. 

While growth and value investing are completely different, they can both assist you in fulfilling your objectives. 

Growth investing
We will start off by exploring growth investing. The basic idea behind this strategy is picking stocks that outpace the rest of the asset markets in terms of their revenue and earnings growth. 

Investors who are looking to harness this strategy tend to pick stocks that generate annual growth in their earnings per share of at least 10 percent, according to the American Association of Individual Investors' (AAII) Investor Classroom. 

While this level may be the minimum needed to attract the interest of growth investors, these market participants frequently look for stocks that generate annual growth in earnings per share of at least 20 percent, according to the AAII resource. 

One key facet of this strategy is that market participants looking to harness it seek out equities with above-market appreciation in revenue and earnings, regardless of the price-to-earnings ratios of the stocks, according to SmartMoney.

This key variation provides a great way to explain the difference between growth and value investing. 

Value investing
This strategy emphasizes finding stocks that have a current price below their usual valuation, meaning investors using this method are seeking out bargains, the media outlet reports. 

There are reasons to use a growth strategy, but a value strategy can be very advantageous for those looking to invest both in the short and long term, since a person doing so could potentially buy a stock with a price-to-earnings ratio of 10 and then later sell it when it reaches a multiple of 20, according to the news source. 

Some bull markets generate more robust appreciation than others, but market participants could have enjoyed substantial returns in the recent rally that started in 2009. The S&P 500 Index surged more than 100 percent between its low point in March of that year and the point when it reached a new record level in the same month in 2013. 

Drawbacks
Although both growth and value investing have their benefits, they both suffer from different drawbacks. If you are considering either of these strategies, you should know the potential pitfalls involved. 

It is important to note that if you want to harness a growth strategy, the stocks that fit into this description have a tendency toward reinvesting their profits to maintain their robust expansion and as a result, they often pay little or no dividends, according to the AAII Investor Classroom. 

Another potential problem is that equities that create these sharp gains in revenue and earnings quickly create visibility, and while this can potentially help the prospects of the firms involved, it can easily cause investors to push their share prices far higher. Since companies in this situation frequently experience sharp asset valuation appreciation, investors must avoid overpaying. 

Alternatively, if you decide to harness a value investing approach, you could potentially pick out an equity with a low price-to-earnings ratio and end up buying the securities of a company that is fraught with challenges, and has low asset prices for a reason, according to SmartMoney.com. 

For example, if you invest in a stock with an earnings multiple that has fallen to a low level, you may never get a strong return - or any return at all, the media outlet reports. 

If you want quality stock trading education, it is available through TradingPub, home to some of the top investors and traders in the industry.