If you’re new to investing, you may not have settled on a particularly investing strategy. While experts say that many people can get away with investing in low-fee index funds rather than trading stocks in individual companies, some people enjoy deciding which company shares to buy. These active investors tend to self-identify as either growth investors or value investors.
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Value Investing Basics
What is value investing? Value investors look for undervalued companies that are trading on the market for a lower price than they should, given their intrinsic worth. Value investors might do extensive research to determine whether the company’s value exceeds its current valuation on the stock market. From a value investor’s point of view, an undervalued company’s stock is a good deal.
If you think that market prices are a fail-proof indicator of a company’s value, value investing won’t make much sense. But if you think that the market may be prone to inflating share prices based on hype or deflating share prices based on imperfect information, it’s easy to see how an informed investor could snap up undervalued shares.
How does an investor get a sense of the true value of a publicly traded company? By researching the company’s fundamentals. If you’ve ever heard the stories about Warren Buffett sitting at his kitchen table after dinner poring over company balance sheets to find good investments, that’s a great example of value investing. Full disclosure: Following the Warren Buffett investment strategy isn’t guaranteed to net you Warren Buffett-level earnings.
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Value vs. Growth Investing
So what’s the difference between value investing and growth investing? The names say it all. Successful growth investing means investing in companies that have a high potential for growth. That growth could translate into more valuable shares and higher dividends for shareholders.
Growth investors always consider what might happen in the future, while some value investors only focus on the current assets and liabilities of a company. That’s not to say that value investing is anti-growth. It’s just that certain value investors view potential future growth as a bonus, not a prerequisite for buying a company’s stock.
That’s why some people advocate a hybrid growth-and-value investing strategy. This hybrid strategy would lead an investor to look for companies that a) have the potential for future growth, and b) are currently trading for a lower price than they’re worth. In a perfect world, an investor could identify these stocks, buy low and sell high. In reality, it’s difficult to “beat the market,” and you can spend a lot of money on trading fees chasing high investment returns.
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Deciding on the asset allocation for your investing portfolio might require some soul searching. If you’re just investing in a mix of stock and bond index funds you probably don’t need to decide whether you favor value investing or growth investing. But if you’re interested in investing in individual companies, whether for income or for fun, having an idea of where you stand on the growth vs. value debate could be a useful starting point.
If you’re just starting out investing and feel like you need some more guidance, don’t hesitate to turn to a professional for help. A financial advisor can help you determine determine the right asset allocation for your portfolio based on your financial situation. SmartAsset’s financial advisor matching tool can help you find an advisor who suits your needs. First you’ll answer a series of questions about your financial situation and goals. Then the program will pair you with up to three advisors in your area based on your answers. You can then read the advisors’ profiles and interview them to choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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