Growth stocks differ from value stocks. Investors expect growth stocks to earn substantial capital gains as a result of strong growth in the underlying company. This expectation can result in these stocks appearing overvalued because of their generally high price-to-earnings (P/E) ratios.
On the contrary, value stocks are often underrated or ignored by the market, but they may eventually gain value. Investors also attempt to profit from the dividends they typically pay. Value stocks tend to trade at a low price-to-earnings (P/E) ratio.
Some investors may try to include both growth and value stocks in their portfolio for diversification. Others may prefer to specialize by focusing more on value or growth.
Some value stocks are underpriced simply due to poor earnings reports or negative media attention. However, one characteristic that they often have is strong dividend-payout histories. A value stock with a strong dividend track record can provide reliable income to an investor. Many value stocks are older companies that can be counted on to stay in business, even if they aren’t particularly innovative or poised to grow.