Investing in the stock market is a great way to make a few extra bucks or pad your retirement account, but only if you do your research and understand your options. While day trading delivers a thrill, value investing and growth investing are two trusted investment approaches which can lead to long-term prosperity. Whether applied independently or combined, these strategies can be an effective way to prevail in today’s stock market.
Value Investing: Right Here, Right Now Value investing looks at a company as it exists right now in the market. This method relies heavily on valuation to identify companies which are worth more than their current trading price. Stock prices can be volatile, and detrimentally influenced by factors like poor quarterly earnings or unanticipated external events. Relying on a tool called the “margin of safety,” investors seek out companies which are undervalued, purchase discount stock and wait for the trading prices to catch up to the company’s fundamental worth. The value investment approach prizes security over growth; generally, these investments can be relied upon to generate income quickly and continue to do so over the long-term. A moderate amount of risk comes into play with companies for which the market has correctly priced shares; in this case, the anticipated intrinsic value may never be realized, resulting in a loss for investors.
Growth Investing: Potential is Profitable
Growth investment casts aside ideas about value and instead seeks out businesses based on substantial growth potential. Growth investors rely on predictive past factors, such as revenue, earnings and cash flow, to seek out companies likely to quickly outgrow their premium valuations. This method relies on the principle that well-managed companies with desirable products and services will continue to grow. Growth investors typically focus on emerging industries, such as research and technology, believing that even if these companies are trading at prices greater than their current worth, their growth potential will eventually lead to soaring prices. While growth investing can be extremely effective and can offer high returns when the stock market is performing well, it can be risky when the market falls. This method offers great long-term potential, but investors need to be comfortable with a degree of risk, as growth can be detrimentally affected by a number of unforeseeable factors.
A Combined Approach
As Warren Buffet once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” When combined into a streamlined approach, value investment and growth investment offer investors an ideal set-up: reasonably priced companies with strong growth potential. Valuation remains a factor, but not the sole consideration, thereby allowing investors to cast a wider net for companies which may be just slightly undervalued while offering extraordinary growth potential. Investors who rely on a combination of the two must also factor in overall industry performance as well as company-specific circumstances while seeking out growing companies with acceptable valuations. While the stock market always carries some risk, there is potential for great reward for investors who use value investing, growth investing, or a combination of the two when making investment decisions. While there is no firm formula for success, you can be on your way to a more prosperous future by judiciously applying one or both of these low-risk strategies.
Joanna Hughes is a freelance writer and blogger who contributes to reputation.com, along with a number of other well-known internet outlets.