Growth Stocks and Value Stocks

One of the most important concepts in investing is diversification. Youn need to have a balance of different types of investments, as well as investments in different types of sectors and companies. In order to have a truly diversified investment portfolio, it is important to have a mix of growth stocks and value stocks. This is also true if you include stock investments in your retirement plan. Growth stocks and value stocks differ, and so it is a good idea to understand the basic differences between the two.

Growth stocks

Growth stocks are those that represent rapid growth. They generally offer higher returns on the stock investments made. However, with those higher returns also come higher risks. A stock's value with growth stocks is usually determined on potential. Growth for small companies is general a yearly return of at least 10%, and for larger companies, it should be around 7%. Some stocks have even higher returns in sectors that have higher potential. When incorporating growth stocks in your portfolio, it might be a good idea to set a reasonable level at which you will sell. This can help you earn a profit and get out before a bear market destroys the value of the stock.

Value stocks

Despite what the name may lead you to believe, value stocks are not usually cheap. They are, however, considered to be good deals. They are solid, steady companies. Their growth is slower, but their strong fundamentals make them more likely to survive a bear market. While losses occur, they are usually less dramatic than price drops of growth stocks. However, by the same token, you won't experience as dramatic profits. A good strategy for value stocks is to look for the 52-week low and try to buy stock at that level. That way you are more likely to make a profit down the road.

In general, growth stocks are compatible with a more short-term investment plan (and an investment strategy based on technical analysis), and value stocks are compatible with a long-term plan (and an investment strategy based on fundamental analysis). It is important to evaluate your stock investments every few months to make sure that properly diversified in your stock holdings. Too many growth stocks can pose great risk to your investment portfolio. And too many value stocks may prevent your portfolio from reaching its potential.

As always, it is important to thoroughly research your investments. No matter the advice you get, you can still lose money. Any investment represents a certain amount of risk.