What's the difference between a growth and value stock? Find the answer in this week's Arista Advice.
Hello, welcome to Arista Advice! Question of the week is: "Paul, what's the difference between a growth stock and a value stock?" This client really wanted to know, and it's a really excellent question to understand that not all stocks in the U.S. stock market are the same. There's big, medium, small, micro small, mega caps. There's a lot of jargon that's used by a lot of the journalists and commentators out there in the capital markets.
But let's talk about a value and a growth stock. First, growth stocks involve companies and industries that have potential to grow very quickly. They are typically lower cash flow. They rarely pay a dividend, and they often are newer companies. The converse is value stocks. They are typically more established companies that have a regular cash flow. They often pay dividends, and they trade below their intrinsic value.
"What's intrinsic value, Paul? Don't throw a scary word out us!" If the balance sheet of the company is five billion, and the stock is trading at at four billion, that's intrinsic value. That's a value stock. It's now on sale. There's a sale. There's a discount on that sale to buy that stock. Also, value stocks are often in industries like energy, financial, health care. While growth stocks are typically in tech, communications, consumer discretionary. Since value stocks trade below their fair values, they are less volatile to bear markets.
As you can see here in this graph, value outperforms growth over time periods going all the way back to 1930, but the 2010s, the lost decade, growth outperformed. But in the last 10 years growth, once again, also outperformed. So just be aware that there is not all stocks are the same and that there's growth, there's value, and that you want to have a mixture of both and always be diversified.
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