The Retirement Corporation of America

Frequently Asked Questions:

Q: What is the difference between a value stock and a growth stock?

A: Stocks are typically divided into two categories based on their characteristics, growth stocks or value stocks.

Each category is quite different in terms of how the stocks perform over short periods, or in some cases longer periods of time. Obtaining a clear understanding of each style is important when investing.

Value stocks tend to have prices that are low relative to their earnings, dividends or assets. Earnings growth for these stocks tends to be relatively modest, and often is heavily influenced by short-term fluctuations in the economy.

Growth stocks, on the other hand, tend to have prices that are high relative to their current earnings, dividends, or book value, but usually have earnings growth projections that are higher than the market average. Because this growth typically is driven by specific industry trends, such as rapidly rising demand for a new product or service, the earnings of growth companies often are less influenced by economic cycles.

Historically, value stocks have been concentrated in several industry sectors, including energy, auto manufacturing, and raw materials. The sectors are all mature businesses with a high degree of cyclical exposure. In addition, the financial services and utilities sectors are considered value stocks because they tend to pay higher dividends.

Growth stocks, by comparison, are frequently found in the computer and pharmaceutical industries, and among brand-name manufacturers and retailers.

Value investors carefully examine the financial fundamentals of a company to determine if the stock price reasonably reflects the value shown there. Like a consumer who waits for a product to go on sale before making a purchase, the value investor is extremely price conscious.

Most growth investors tend not to be price-conscious. They analyze a company with the belief that the company can deliver above-average earnings growth through development of new products, expansion into new markets, or investment in new technology.

The long run returns of both styles are very similar over the past twenty years. However, there have been many shorter run periods when one style has outperformed the other by a very large margin. There have been large annual differences in favor of one style, followed by a sharp reversal in favor of the other style. An investor can do great harm to their portfolio by trying to move from style to style over shorter periods to catch the "winning style".

At RCA, our goal is to identify an investment program that meets your individual goals, and then utilize a combination of both growth and value stocks to accomplish your overall long-term objectives. Investors who concentrate solely on one style of investing run the risk of lower returns and/or higher volatility over extended periods compared to the broad market. Proper diversification can help protect investors from extended periods of underperformance due to the changing fortunes of value and growth stocks.

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