Building A Portfolio: Growth, Value & Income Stocks
Spot the difference!
So you’re ready to buy stocks. But whether you’re a DIY investor or working with a financial advisor, it still pays to know your way around the market so you can be sure you’re picking the right investments for your needs. But do you know your growth stocks from your value stocks? Hands up who can tell me what income stocks look like? The key is to know what you are investing for, i.e. what are your financial goals. Are you saving and investing for retirement, or to build wealth for exemple?
OK, let’s break it down.
Growth, value and income stocks are all shares in companies, but ones which have different uses to the investor.
Let’s start with income stocks. These are ones you buy because they pay good dividends, the idea being that you will get regular earnings by holding on to them rather than a one-off windfall from selling them. Usually no big, shiny, dramatic companies here but rather established, functional companies whose stability suits a more cautious or long-term investor. Putting your money in these companies may not be the most exciting thing in the world, but the best-case scenario with these type of stocks is that they could continue paying you an income long into your retirement.
Now for growth stocks.The clue’s in the name, people. These relate to companies that are on the up, with predicted steep growth in the short term. They are likely to be selling a new product that people are soon going to want a lot more of (Drip coffee? Paper drinking straws? Protein-enriched Mars bars? Heck, you decide: we’re not financial advisors, you know!), or an industry that while historically may not have been that mighty is now getting bigger. They could show astronomical growth over the short term. But you’re unlikely to be paid any dividends, since new, rapidly growing companies tend to re-invest their revenue. However you can’t just sit back and relax with these guys: you’ll need to keep an eye on their movement.
Value stocks are a little different. They are usually trading at a price below where it appears it should be. When investing in these companies you really need to look at the fundamentals of a company to understand their true value. It is also called contrarian investing - because in order to make money you would have to be confident that you know secrets that the rest of the market does not. Ker-ching!
Don’t forget about diversification when building your portfolio - don’t put all your eggs in the same basket! We believe a mix of all these could help protect your portfolio. Remember that the value of investments can fall as well as rise and you could get back less than you invest.
If you’re not sure about investing, seek independent advice.
In practice, how do I find these types of stocks?
It takes a bit of digging, but you just need to do some research online (if you’re a DIY-er) or ask your investment manager, who should automatically know which stocks fall in to which category. The info is out there for you to discover.
As we often say at Vestpod, learning the vocabulary of finance is an important step towards confidently talking about money. So even if you’re not yet ready to strategise your investment portfolio according to these three types of stock (and even if you don’t have and investment portfolio at all - yet), just knowing the terminology of growth, income and value means you are a little bit more empowered than you were yesterday. Baby steps, sisters!