Growth and Values –What’s the Difference?
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
You can define stocks in many ways. Some characterization is perhaps the most common. There are “large capitalization” stocks, better known as blue chips or “large –caps.” There are small caps stock, issued by companies in the early stage of their development, and then there are mid cap stocks, which are somewhere in-between.
Stocks are already categorized by the types of companies that issue them. For example, stocks are issued by companies in the technology, retail, manufacturing, and utility industries. Yet another way to tell one stock from another is by the investment style of the mutual fund managers likely to choose them. Some are good stock; others values stocks. What’s the difference between the two?
Understand the Difference
Growth stocks generally are companies with above average growth potential. These stocks may cost slightly more than other stocks, when you consider their price /earnings ratios, but investors are usually willing to pay more for these securities because of their above average growth potential. (The price earnings ratio is the market price of a stock divided by its annual earnings per share. For example, if a stock sells at $100 per shares and earns $ 8 per share, it is selling at 12.5 times its earning.)
Growth-oriented companies typically have products and/or services that are increasingly in demand, a strong executive team with a prudent business plan in place, and a healthy overall financial situation. Growth investors are looking to buy a stock at a moment when it’s cheap- because the present value of its future cash flow is being grossly underestimated by the financial community. For a classic statement on growth investing, see Philip Fisher’s book Common Stocks and uncommon profits.
Values stocks are, at first glance, not the most attractive investment opportunities you will find. Many are coming off periods in which they have experienced a decline in earning, lost an important client, or suffered a major loss within the executive’s ranks. So why invest in these securities?
If you look closely at some value stocks, you may find a diamond. A stock may be down because the industry in which it operates has been going through a difficult time. This may be the type of stock that will do well when the industry recovers.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
