Growth vs value stocks

Definition

Growth vs value stocks describes two ways of picking shares. Growth investing looks for companies whose sales and earnings are expected to rise faster than the market, even at a high price. Value investing looks for companies whose shares trade cheaply compared with their earnings, assets or dividends.

• Growth stocks meaning: shares priced for strong future growth. They usually have high price-to-earnings (P/E) and price-to-book (P/B) ratios, and they often pay small dividends or none, because profits are reinvested.
• Value stocks meaning: shares priced low against current fundamentals. They usually have low P/E and P/B ratios and often pay higher dividends.

Worked example (hypothetical)

Take two invented companies with the same share price.

Buyers of A pay a lot for each rupee of current profit. They are betting that future profits will justify the price. Buyers of B pay little for each rupee of profit. They are betting that the market has priced the company too low.

The risks differ:

• If A's growth disappoints, its high ratio can fall sharply.
• If B is cheap because its business is shrinking, its price may stay low or keep falling. This is called a value trap.

To compare real companies, divide price by earnings per share (P/E) or by book value per share (P/B) using figures from each company's reports.

Formal definition and edge cases

Index providers and researchers classify stocks by measurable factors, not by opinion:

• Value factors: book-to-price, earnings-to-price, dividend yield.
• Growth factors: historical and forecast growth in earnings and sales.

In academic finance, the value effect is measured as the return of high book-to-market stocks minus low book-to-market stocks (the HML factor).

Edge cases:

• A stock can score on both sides. Some style indices split its weight between the growth and value versions.
• Classifications change at index reviews as prices and fundamentals move.
• Sector mix matters. Technology tends to land in growth indices, while banks, energy and utilities tend to land in value indices. Growth-heavy indices such as NAS100 therefore behave differently from broader indices.
• Growth stocks are often more sensitive to interest-rate changes, because more of their value depends on profits far in the future.
• "Growth at a reasonable price" is a mixed approach that sits between the two styles.

Where the term appears

• Fund factsheets: a "style box" places a fund on a value–blend–growth scale.
• Index names: providers publish separate growth and value versions of their main indices.
• News: headlines about "rotation from growth to value" describe money moving between the styles, often linked to interest rates or the business cycle.
• Screeners and broker research: columns for P/E, P/B, dividend yield and earnings growth.

Trading platforms such as MetaTrader 5 show prices and charts but do not label instruments as growth or value. If you trade stock or index CFDs with leverage, losses can build quickly regardless of style. See risk management before you trade.

Related terms

• Fundamental analysis
• Book value
• Blue chip stocks
• Beta
• Contrarian investing
• Ex-dividend and record date
• Capital gain and loss
• Bull market and bear market
• Stock indices
• Trading glossary

Frequent questions

Which style performs better?

Neither style wins all the time. Each has led the market for long periods and lagged for others. This page makes no forecast.

Is a low P/E always a value stock?

No. A low P/E can reflect real problems, such as falling sales or high debt. Check why the ratio is low.

Do growth stocks pay dividends?

Some do, but they usually pay less because they reinvest profits to grow.

What is value investing?

Value investing means buying shares priced below what an analysis of earnings, assets and cash flow suggests they are worth. It then means waiting for the market price to move closer to that estimate. The approach is linked to Benjamin Graham and Warren Buffett.