What are Value and Growth Stocks?

Stocks that trade at low prices relative to their fundamentals, including earnings, book values and other measure are value stocks.  Investors believe a stock is a good buy if it’s likely to return to its normal levels when the market comes to its senses and appropriately prices the stock.  Of course a stock could be underpriced for a reason and thus value stocks are considered more risky than, for instance, growth stocks.

Growth companies exhibit strong earnings growth and high profitability.  They typically retain earnings to invest in capital projects that drive growth.  From a fundamentals stand point growth stocks have a relatively high price-to-earnings ratio.  Google is a great example of a success story for growth stocks.

Although growth stocks are the most popular ones (and almost universally regarded as the safest investments), much research shows that historically, unpopular (value) stocks outperform popular (growth) ones.