sip or lump sum which is better

SIP or Lump sum – Which one is better?

SIP or Lump sum -Which one is better? Whenever a newbie investor plans to invest in the stock market, the most common question for him/her is whether to invest in a Systematic Investment Plan- SIP or Lump sum.

Should he invest his entire savings of Rs 1 lakh in one go (when the time is correct), or should he invest Rs 10,000 systematically for the next ten months?

Many times this question can be quite confusing. Without proper guidance, the stock market beginners are not able to decide which one is a better strategy to invest. Whether to choose SIP or Lump sum.

Which investment approach will generate high returns- lump sum or systematic investment plan?

Have you also come across the same question?

If yes, then continue reading this post because here I am going to explain the difference between SIP & Lump sum and which one you should choose.

There are different scenarios covered in this post to easily understand the approach to be followed by different investors to select between SIP or lump sum. Here is a detailed analysis.

SIP or Lump sum -Scenario 1:

Imagine in the first scenario, you and your friend decided to start an apple farm independently. You both agreed to sow some apple trees in your gardens for a period of one year and then calculate the net growth at the end of the year.

sip or lump sum example 1

You both went to the market.

However, you both decided different approaches for your gardens.

On one hand, you bought all the apple seeds at once and sowed it in the garden.

On the other hand, your friend settled to buy the seeds monthly and sowed little every month.

Further, in this scenario, let us assume that the price of the seeds remained unchanged throughout the year.

At the end of the year, what result do you expect? Whose apple garden will have better trees?

Obviously, the one where the seeds got maximum time to grow. You gave an entire one year for your trees to grow.

However, your friend didn’t give the full year and the duration was different for the batches of seeds bought in different months. Clearly, your apple garden will give better results.

Now, let us understand this first scenario in a more pragmatic way with the help of an example.

Suppose you invested Rs 1 lakh lump sum amount at the start of the year and your friend invested Rs 1 lakh in SIP i.e. Rs 25,000 per quarter.

Let you invested in a fixed deposit (FD) at 8% ROI and your friend invested in recurring deposit at 8% for a year.

In this case, although you both have invested the same amount, however, you will accumulate more wealth compared to your friend. Let me explain why.

This happened because you invested the whole money for a complete year.

In comparison, your friend invested Rs 25,000 every quarter. So this amount remains invested for 12,9,6 and 3 months respectively (till the end of the year).

Since your friend’s average investment period is small here, hence the interest will be less.

Further, if your friend even has got higher recurring deposit rate, say 9, 10, 11 or 12% rate of return, still, he would not have been able to match your lump sum investment.

Here are the returns on the lump sum vs recurring deposit (at higher rates) for an investment of 1 year:

ROI on Lump Sum Return after 1 year ROI on Recurring deposit Return after 1 year
8% Rs 108,000 9% Rs 105,752
10% Rs 106,408
11% Rs 107,066
12% Rs 107,728

Note: You can use this site for calculations- http://everydaycalculation.com/sip.php

To get a similar return, only at 12.5% ROI or above, your friend will be able to match you.

This illustration proves that for growing your investment, time is most important. That’s why it is said to start investing as early as possible.

Also read: How Much Return Can You Expect From Stock Market?

SIP or Lump sum -Scenario 2:

Now, let us learn further the SIP or lump sum in another scenario.

We have to go back to our apple gardens to understand the prospects of this scenario.

Here, let’s take that the buying strategy of you and your friend remained the same. You decide to buy all the apple seeds at once and sow it at the starting of the year.

On the other hand, your friend settled with monthly investment on apple seeds and decided to buy and sow the seeds monthly.

Now, in this second scenario, let us assume that the price of seeds starts falling every month and kept falling till the end of the year.

As your friend bought seeds monthly, he will be able to buy more number of seeds on the investment amount, because the seeds price kept falling.

Let’s understand this better with an example.

Assume that the price of apple seeds was Rs 300 at the start of the year.

You are your friend, both planned to invest Rs 30,000 in the entire year.

As you bought all the apple seeds at the start of the year, you would have been able to buy (30,000/300)= 100 apple seeds.

Let’s further assume that the price kept falling monthly at a rate of Rs 2 per month. So the price of the apple seeds in the subsequent months will be Rs 298, Rs 296, Rs 294 … Rs 278 (at the end of the year).

Taking the profit of the declining apple prices, your friend will be able to buy more apple seeds by the end of the year.

In this scenario, although you have invested for a longer time, however, your friend will get better results.

This happened because of the lower average cost. The average purchase price of a single seed by your friend will be much lower than what you paid for. Hence, in the same investment amount, your friend will be able to buy more number of seeds.

And therefore, your friend will plant more of apple seeds until the end of the year and will get much better results on his investment compared to you.

Note: This concept is called Rupee cost averaging.

Nevertheless, this is again only one side of the story. Imagine if the price of seeds kept increasing per month. Then what would have happened?

The outcome would have been totally different. You would have easily got much better results compared to your friend in this rising price scenario.

SIP or Lump sum -Scenario 3:

In this third scenario, let us assume that the prices of the apple seeds kept changing (increasing or decreasing throughout the year).

Here, average cost technique is used to calculate the return on your friend’s investment.

However, the return on your investment here depends totally on your entry and exit time.

If the prices were low when you entered and high when you decided to exit, you might have been able to book great profits compared to your friend who would have just got the average profit.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

Conclusion:

Here are a few of the main conclusions of SIP or lump sum which you can derive from this post.

  • SIP can reduce the market fluctuation risks by Rupee cost averaging.
  • Invest in the lump sum when the market is continuously rising.
  • Invest in SIP when the prices are falling

Overall, it’s not easy to select an investment strategy between SIP or Lump sum. An intelligent investor should choose his own style, depending on his style and preference. In addition, market situation and opportunity also drives the investment strategy from time to time.

That’s all. I hope this post on ‘SIP or Lump sum- Which one is better?’ – is helpful to the readers.

Further, also comment below which investment strategy you prefer- SIP or Lump sum?

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

HOW MUCH RETURN CAN YOU EXPECT FROM STOCK MARKET COVER

How Much Return Can You Expect From Stock Market?

How much return can you expect from stock market? Most of the people enter the stock market with the sole purpose of making money. Inspired by the veteran billionaire investors like Warren Buffett, Rakesh Jhunjhunwala, RK Damani etc, they also want to try their knowledge and luck.

However, while most people dream of making huge fortune from the market, they end up losing money. This end is mainly because the newbie investors do not know what return they can expect from the market.

A common investor enters the market with some arbitrary goals to double or sometimes quadruple his/her investment in six months time duration. But in the real case scenario, even the best investors cannot achieve this big goal in that short amount of time.

I do not blame just the retail investors for those surprisingly high return expectations. There are many agencies who inflate their thoughts like media, stock brokers, fraudsters etc.

For example, everyone knows the story of Mr Rakesh Jhunjhunwala about how he bought the stocks of Titan Company at Rs 3, which is currently trading at Rs 600 level. This news, which is commonly circulated by the media drives the high expectations of the common investors from the stock market.

Nevertheless, what about the other stocks in Rakesh Jhunjhunwala’s portfolio? Do you know how much return his other stocks gave? Do you know what percent of net portfolio was allocated for Titan Company by Mr Jhunjhunwala? He has more than at least 20 stocks in his portfolio. If few stocks have given him multiple time returns, then few might also have been in loss. The average portfolio return will surely come down if we calculate the cumulative profits and gains of all the stocks. Still, people ignore to know the complete facts and expect to get huge returns from their investments in six months just like Mr Jhunjhunwala.

Then comes the stock brokers. The brokers encourage the investors to invest in some stocks that they suggest as a multibagger stock ( Multibagger are those stocks which give multiple times returns compared to initial investment). But how come the brokers do not buy the same stocks in bulk and make millions if they are damn sure if it’s going to be a multibagger. Instead, they just advice to buy those stocks to their clients suggesting them that the stocks will make huge fortunes for them in short amount of time.

And lastly comes the fraudsters. Some fraudsters’ claims to give 60-80% return in six month. You can find a number of such stock advisors if you simply google- best stock market recommendations in your area. These fraudsters even claim to give 99% accurate suggestions. Unluckily, many common investors believe them and expect to get 80% returns in next six months.

With all these things going around, a common investor keep his expectations way too high when they enter the stock market. If you say that you have earned 20% annual returns from the market last year, they will laugh at you and ask that why did you entered the stock market for this low returns then. They believe that one should enter the stock market only if they get high returns, say 50% per annum.

However, there are many things that these newbie investors are missing out about the return you can expect from stock market. Let me focus some light on them.

Warren Buffet Performance through Years: 

Everyone knows about Warren Buffett. The greatest investors of all time and one of the richest men on this planet. Let’s take Mr Buffet’s annual return from his company ‘Berkshire Hathaway’ as a benchmark and analyze his returns. Here are the returns of Berkshire over the years:

Source: http://awealthofcommonsense.com/2015/03/buffetts-performance-by-decade/

Source: http://www.marketwatch.com/story/from-6000-to-67-billion-warren-buffetts-wealth-through-the-ages-2015-08-17

From the above table, there are two important points worth noticing:

  1. Warren Buffett has earned an average of 22% return per year for the period of almost 6 decades now.
  2. 99% of his wealth has been accumulated after an age of 50.

Now, you might ask me that how the hell then Warren Buffett became the richest man in the world.

The answer is simple. It’s consistency and patience. Consistency because he got an average return of 22% year after year. Patience because he did it for around 6 decades. That’s an amazing figure considering there will be many bear market, crashes, economic recession etc that would have happened in that long time frame.

Many people can get 40% return in a bull market. But can they do the same in bear market, when the market is going down and making new lows day after day. Can they still get an average 20% return?

Although for few years, Warren Buffett has received a return of around 39% per annum and for some years as low as 5.9% per annum (during the 2008 recession). However, it is the consistent return of 22% per annum that has made him one of the richest people in this world. Moreover, it’s the power of compounding that has played a major role in making him rich. His net worth increased exponentially with time.

There’s another example of a great investor and fund manager- Peter Lynch, whom we can consider to figure out the return can you expect from stock market. Mr Lynch was able to receive an average return of around 29% per year for a period of 13 years, when he was the fund manager at Fidelity Investments. That’s why he is considered as one of the greatest fund manager of all time. However, 13 years is too small compared to 6 decades of consistency shown by Warren Buffett.

If you want to learn stocks from scratch, I will highly recommend you to read the book: ONE UP ON THE WALL STREET by Peter Lynch- best selling book for stock market beginners.

How Much Return Can You Expect From Stock Market?

Taking all these in consideration, we can conclude that an average return of 15-20% per year can be considered good in stock market. Do not try to make money fast. Try to achieve an average return of 20% per year first. Above this, everything is a bonus of your intelligent investment and an added fortune for your portfolio.

Further remember that you get only get 4% simple interest return in your saving account. This return is way much higher than your saving returns.

Performance of Sensex over the years:

Now, let me walk you through the sensex to help you out with what return can you expect from stock market vs actual that this index has given over the years. Here is a graph of Sensex:

From the above graph, you can notice that Sensex has moved from 17,500 level in August 2012 to 32,300 current level (August 2017). Over the period of last five years, Sensex has given a cumulative return of around 85%.

Now, if we consider from August 2002, Sensex was at 3000 level then. Hence, for the last 15 years, Sensex has given a return of around 960% (over 9 times).

Overall, for the long term, Sensex has outperformed all the other investment options like saving, fixed deposits, gold, commodities etc.

Also read: Getting Smart With Investment in Gold.

Conclusion:

From the facts discussed in this post, a good return can you expect from stock market is around 15-20% per annum. This is in context with a retail investor. Any additional return above this can be gained as an added value because of the excellent stock selection and good fundamental and technical study of the stocks in your portfolio.

Further, it’s not just the return that matters. The consistency in getting the returns year-after-year will help you in making huge fortune.

Bonus:

Let me further explain how a consistent return of even 15% per annum for long term can help you to create great fortunes.

Suppose you invested Rs 1 lakh in some good stocks at an age of 25. You remained invested till the age of 60. Therefore, the duration of your investment in 35 years.

Here is your final returns at 15% CAGR (compounded annual growth rate) after 35 years:

Year Year Interest Balance
1 15,000 115,000
2 17,250 132,250
3 19,838 152,088
10 52,768 404,556
20 213,477 1,636,654
30 863,632 6,621,177
35 1,737,072 13,317,552

Note: You can calculate the compound interest returns here- http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Your Rs 1 lakh investment at an age of 25, turns out to be over 1.33 crores at an age of 60 (considering the annual return of 15%). 

Further, this example shows just one time lump sum investment. Imagine the fortune that you can make if you can keep investing the same (or larger) amount year after year. You can easily create great wealth considering the decent returns from the stocks.

That’s all. I hope this post on – “How much return can you expect from stock market” is useful to the readers. Do comment below what are your expectations from the stock market.

6 Surprisingly Common Financial Mistakes People Make in Their 20’s

6 Surprisingly Common Financial Mistakes People Make in Their 20’s: It is often said that the mistakes you make in your early days come back revolving around to you in future. We all have been a spectator of how lifestyle standards have been raised to a whole another level. Statistics say that we tend to indulge in the reckless shopping’s mostly in our 20’s. Keeping up with the standards of style quotient might be one of the reasons for the adults to not pay attention at their savings. It is a matter of time when you get to realise how roughly life can strike you with its lows.

We don’t mean to scare you in the first place but in this article we have managed to gather some of the most common financial mistakes that people do in their 20’s that can end up making them financially vulnerable in the near future. You can pay your attention at them to know money mistakes to avoid in your 20’s. So, let’s get started.

Common Financial Mistakes People Make in Their 20’s

1. Pursuing a degree you don’t want to on a student loan:

Common Financial Mistakes People Make in Their 20's student loan

You have to admit that in your teen years, you find it very hard to decide what you want to pursue and make your career in. In countries like India we get influenced by the aspirations of our parents and society that eventually ends up getting us admitted in colleges for a degree that doesn’t even ring a bell to us. Most people choose to pay their college fee through loans that they have to repay at a considerable interest rate which can be really burdensome sometimes.

2. Getting influenced by big fat Indian wedding:

Common Financial Mistakes People Make in Their 20's wedding

Accept it or not, it is just one day party in which you blow your entire life savings just by being fascinated by that glittery and sugar coated wedding idea and plan. This is one of the major money mistakes to avoid in your 20’s. The wedding industry is one of the biggest industries of the country with an annual turnover of billions. Now, you need to understand that there are other important things in your life which you can spend wisely on. Have a good wedding but don’t put in your entire financial savings at stake.

3. Not being in a habit to save:

Common Financial Mistakes People Make in Their 20's no savings

Trust us; it is very easy to save a part of your income. With this habit, you would be able to make your future much better. Spending your entire income on things and services could insure you a luxurious lifestyle for now but at the same time, it is also putting you at a risky position in future. Life is really unpredictable and uncertain and you never know what you are going to need in future. Moreover, if you will look for a switch of job in future, you will definitely need some cash in hand to keep your stomach full for a couple of days until you get a hold of your new job.

4. Not keeping an emergency fund:

Common Financial Mistakes People Make in Their 20's no emergency fund

Most people choose to spend their money on shares and stock market without even knowing a bit of it. Instead you should maintain and put enough money in your emergency fund that will back you up in the odd times that might act as a hurdle in your life in future. You must put enough money in the fund for medical expenses and at least 6 month of unemployment. There are various ways and schemes provided by different insurance companies to ensure such funds for you. Sadly, most of the people in their 20’s fail to keep an emergency fund for themselves.

5. Not saving for your retirement:

Common Financial Mistakes People Make in Their 20's

The age group of 20’s is also known as the carefree zone. As the name suggests, most people are unaware and seem careless about their retirement plans. Of course, they must find the time of their retirement far enough to be out of scope but it is actually not. 20’s is the correct time to start your retirement fund. You must make sure to put a little every month in your retirement that would yield an amount adequate enough to feed you and fulfil your needs after your retirement. Another money mistakes to avoid in your 20 is not paying attention on your retirement fund.

6. Spending recklessly on credit cards:

Common Financial Mistakes People Make in Their 20's credit cards

Getting your hands on a credit card is very easy these days. Seems like teenagers in their 20’s cannot keep their hands off these credit cards! With amazing schemes, cash backs and numerous deals going on every day at various places make you spend a fortune through these easy cards. Now, you must remember that the money has to be paid by you only at the end. Most people get caught in their debts of credit cards bill and keep on paying for months and years to completely get rid of those debts. That is why one should remember to spend wisely in their 20’s.

I hope this post on “6 Surprisingly Common Financial Mistakes People Make in Their 20’s” helps the newbies in early 20’s to avoid these common mistakes.

Further, do comment below if you had made any big financial mistake in your 20’s.

Why You Should Start Saving Early featured image

7 Worth-It Reasons Why You Should Start Saving Early?

7 Worth-It Reasons Why You Should Start Saving Early? You may be a good spender or a hoarder of fancy things that grace up the lifestyle of yours but saving a little from what you get every month, comes in very handy for your future endeavours. Major problems in life always come unannounced and offer you a wee time to prepare for it. Nevertheless, it is never too late to figure out a little plan for your saving as it is said that as soon as you start saving, the better are the advantages. Let us guide you with the impeccable benefits of early savings.

Why You Should Start Saving Early?

1. More Saving = Less Unnecessary Spending

Why You Should Start Saving Early

The number of gadgets that you have won’t matter but the savings would. We all know how recklessly we get to spend as soon as we get our hands on those big fat pay checks. Also, half the things you buy aren’t even worth the money and therefore they just increase your reckless spending. If you stay firm on saving a part of your income as soon as you get it, you will make sure that you keep it safe and untouched until when in need. Therefore your own money is actually getting saved from being spent unnecessarily.

2. Gives you a way to live your dreams:

Why You Should Start Saving Early - Enjoying

We tend to have lots of dreams since our childhood to the time when life actually strikes us. Amidst of our busy schedules, those dream plans of ours start fading away. It never actually matter about the number you make but what matters is how much you have lived up to your own dreams. A little spending from the beginning helps in funding us to live our dreams in future to the full extent and worth a reason why you should start saving early. As you see, absolutely nothing comes cheap in the 21st century.

3. Chip in for your own education:

Why You Should Start Saving Early- Education

A good education is termed as an investment and not as expenditure. Anything that you spend for useless things for now can be saved in a fund that will provide you a quality education in future. Even if you are done with your under graduation, does it mean that it is the end of the ‘scope of your learning curve?’ NO. You can go ahead and pursue the degree you always wanted to in your post graduation and can follow your dreams. Nothing worth having comes easy and also for free. Save some money yourself to treat yourself with good education in future!

4. Bad times come without an alarm:

Why You Should Start Saving Early- Uninvited stress

Losing jobs, going downhill on health and family problems are some of the tit bits that life offers to everyone. You never know when you would have to experience the lows of life. All you can do as for now is to prepare yourself for the worst. Speaking of which, you should also make sure to have a strong financial back up for these toxic circumstances. Fixed deposits and saving accounts come in handy for the savings that you need to do. Being financially stable even during the bad times of life gives a great motivation to move forward.

5. Let the bank serve you with interest:

Why You Should Start Saving Early power of compounding

The principal amount that you deposit as your savings in bank is interested after a particular span of time. Moreover, if the interest is compound, you will get to save a heck of money if you will be consistent. The best idea would be to choose a bank that offers you a good interest rate on your savings. The sooner you start to save and deposit in bank, the better will be the final amount. That’s an easy math you can do yourself.

6. Be Ready with Your Retirement Fund:

Why You Should Start Saving Early- retirement

It often gets very hard to maintain your luxurious lifestyle after your retirement. That is going to be the time when you will regret not maintaining a retirement fund in your early days. You must know that there are a number of mutual fund retirement schemes provided by different firms across the globe but choosing the one that is most appropriate to you and at the same time, serve your needs to the fullest should be your pick. You must also make sure to read their policy agreement well enough before going with them.

7. You will be willing to take risks:

Why You Should Start Saving Early- risk taking

Life is all about taking risks but you should be smart enough from the beginning to be able to take the decision of risking things that don’t matter to you anymore. For instance, if you will be looking for a switch to a more decent company in future then you must have a financial backup already. Not having one actually stops you taking worth taking risks in life that have the potential of turning your world around. This way, you would be able to concentrate on your switch and won’t worry about the money.

That’s all. I hope this post on why you should start saving early changes your extravagant lifestyle. Further, do comment below any other reasons that you think should be mentioned on why you should start saving early list.

Growth Stocks vs Value stocks – A logical Comparison

Growth Stocks vs Value stocks- A logical comparison: There are many ways to approach investing in stock markets. However, a growth stock and a value stock are considered very important in deciding the strategy for many investors in a different set of companies. Understanding growth stock vs value stock can help you to pick your investing strategy.

Many a time, you might have wondered why people are buying the stocks which are trading at such a high Price to Earnings (PE) ratio. Further, you might also have thought why most intelligent investors are looking for a low PE. The difference in the stock choosing strategy is itself contradicting and can be confusing for the newbie investors.

Therefore, in this post, I am going to explain the growth stocks vs value stocks so that you can develop a clear understanding of the different approaches of the veteran investors. Further, I have a surprise additional investment approach in the last section of the article. So, make sure you read the article until the end.

GROWTH STOCKS VS VALUE STOCKS

GROWTH STOCKS:

We can define a growth stock as a company which is growing at a very fast rate compared to its industry and market index. These stocks have a large PE ratio. The high valuation of these stocks is justified with the earnings as it grows very fast year after year. Typically, the growths of these companies are around 15% per year, while the rest of the nifty 50 stocks grow at an average of 5-7% per year.

A growth investor doesn’t care whether the stock is trading above its intrinsic value as long as the market price of those stocks keeps rising. As the growth and earnings of those companies are way higher than the peer companies, the investors expect those stocks to trade at a high PE.

Few examples of growth stocks from Indian stock market are- Eicher Motors, Hindustan Unilever (HUL), Colgate etc.

VALUE STOCKS:

A value stock has completely different characteristics than the growth stocks. These companies do not have a high growth rate, rather they grow very slow. However, these stocks trade at a low market price.

The concept of value investing was introduced by Benjamin Graham (the mentor of Warren Buffett), back in 1930’s. In his famous book ‘The Intelligent Investor’, Ben Graham has described the approach for a value investor, along with few other important concepts like Mr. Market & Margin of safety.

Note: If you want to build good fundamentals in investing, I will highly recommend you to read the book- The Intelligent Investor by Benjamin Graham.

Value investors look at investing in stocks as buying the super cheap company through finding its intrinsic value using company’s fundamentals as reported in quarterly and annual reports.

The value investing approach is simple. The value investors look for an opportunity to buy a stock which is way less valued in the market than it’s intrinsic value and buys it. A value investor believes that this stock will rise to its true intrinsic value in future. He holds that stock until it goes back to its normal value.

Few current examples of value stocks from Indian stock market are- HPCL, Coal India etc.

There are a number of financial indicators used to determine an undervalued stock for value investing. Here are two of the most commonly used indicators:

  1. Price to Earnings Ratio (P/E)

The Price to Earnings ratio is one of the most widely used financial ratio analysis among the investors for a very long time. A high P/E ratio generally shows that the investor is paying more for the share. As a thumb rule, a low P/E ratio is preferred while buying a stock, but the definition of ‘low’ varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have different P/E ratios for the companies in their sector, and comparing the P/E ratio of company of one sector with P/E ratio of company of another sector will be insignificant. However, you can use P/E ratio to compare the companies in the same sector, preferring one with low P/E. The P/E ratio is calculated using this formula:

Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)

  1. Price to Book Ratio (P/B)

The Price to Book Ratio (P/B) is calculated by dividing the current price of the stock by the latest quarter’s book value per share. P/B ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower P/B ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.

Price to Book Ratio = (Price per Share)/( Book Value per Share)

Read more here: 8 Financial Ratio Analysis that Every Stock Investor Should Know

Both value stock and growth stock investing approach are an effective way to make money from the stocks. There is no fixed way of investing that you should choose and stick to it.

Most of the successful investors have first studied the value stocks vs growth stocks approach and then developed their own unique style.

CONCLUSION: Growth Stocks vs Value stocks

GROWTH STOCKS VALUE STOCKS
A growth stock is bought at a fair price. A value stock is bought at a discount to its intrinsic value.
They have a huge potential for future earnings. Earnings growth is small. However, the value investors make profits when the stock reaches its true intrinsic value.
They have higher PE ratio. Value stocks have low PE ratio.
They give low or no dividends. Value stocks give good dividends.

Here is a chart for the PE ratio of growth stocks vs value stocks vs industry-

growth stocks vs value stocks plot

BONUS SECTION: INCOME STOCKS

This is the third way to invest apart from the value stocks and growth stocks. An income stock approach is investing in those stocks which pay a high, regular and increasing dividend.

The high dividend yield of these stocks mostly generates the overall returns.

Dividend Yield

A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage.

Dividend Yield = (Dividend per Share)/(Price per Share)*100

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor weather he wants to invest in a high or a low dividend yielding company. Read more: The Fundamentals of Stock Market- Must Know Terms

The dividend yield of income stocks is higher compared to the peers in industry and market index.

While investing in an income stock, you should always choose in a fundamentally strong company. Otherwise, if the profit decreases in future, the dividends will also decrease.

Also read: 10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

That’s all. I hope this post about ‘Growth stocks vs value stocks’ is helpful to the readers. Further, do comment below which investment strategy you follow: Growth or value?

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Tags: growth stocks vs value stocks, definition and example of growth stocks vs value stocks, difference between growth stocks vs value stocks