subject: Making Growth And Value Investing - Easy To Understand [print this page] Investing in the stock market can be very confusing. Large cap stocks, small cap stocks, value, growth, what does it all mean? Why do I need to have both? Isn't it enough just to have several different stocks? The answer is no. While diversification is the key to making money in the stock market, diversification doesn't just mean having different stocks and bonds. It means having stocks that represent different market segments such as Growth and Value. The market favors Growth or Value, never both at the same time. The key to making money is to make sure you are invested in growth BEFORE the market turns to growth. Likewise, you make money by being invested in VALUE stocks before the market turns to value. Here's what you need to know.
First what is value investing? Value investing, in technical terms, is buying stocks with a high dividend yield, low price to book ratio or low price to earnings ratio. Got it? Growth investing is the opposite. A growth stock is a stock that is expected to grow at an above average rate relative to the market. Usually it doesn't pay a dividend. Understand? Let me put it into simpler terms.
In general terms, value stocks are the companies that you probably use everyday. They aren't flashy, they get the job done. Their stable, reliable, you don't think twice about them really. Companies like AT&T, GE and DuPont generally fit the bill. Growth stocks are different. They can be flashy. They can be go getters. These companies are not content to rest on their laurels; instead, they tend to bring out new products fairly often. Think of companies like Apple, Google and Microsoft. Now you know the type of stocks to look for, but when should you buy them? The answer is the economy.
When the economy slows down people are afraid of losing their jobs, and tend to spend less money. Consumers are sticking to the basics; they aren't buying the hot new products. The government, worried about a recession, may even lower interest rates. In this economy, value stocks provide a safe haven. As we go on further into the year, the government may continue to lower interest rates, trying to get the economy moving. Slowly, the economy starts to turn around, and now growth stocks will outperform value stocks. Understand? A slow economy, be in value stocks. As the economy starts to get better, growth stocks will outperform value. Growth and value work as opposites. If your value portfolio is up, your growth portfolio will be down. If your growth stocks are up, your value stocks will be down. Seems simple enough right?
What value stocks should you buy in a slow economy? Do your own research. Think of what products or items you won't give up or stop using. Where are you shopping now versus where do you shop in a strong economy? Those are generally good companies to own. Ask the same questions of a growth stock. What is the new item everyone is looking to buy? What have I been putting off buying until the economy got better? Keep your eyes and ears open and you'll know where to put your money.
If you follow these guidelines, at the very least you will have a better understanding of how the market works. One important piece of information to remember is not to chase an investment strategy. Have both growth and value in your portfolio at all times. Remember, it's always better to be early than late to the party.
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