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According to Investopedia, a growth stock is: “a share in a company whose earnings are expected to grow at an above-average rate relative to the market.”  Growth stocks typically do not pay a dividend.  Instead, these companies prefer to reinvest their earnings back into the company.  Growth stock investors are looking to purchase stocks based on the potential for capital gains, not for dividend income.  Therefore, growth stocks can be risky.

A value stock, as defined by Investopedia, is “a stock that tends to trade at a lower price relative to its fundamentals (e.g., dividends, earnings and sales) and thus considered undervalued.”  Value stocks tend to have a high dividend yield, and/or low price-to-earnings ratios.  A value stock quite often will come from a mature company with a stable dividend that is temporarily experiencing negative events.

Both growth stocks and value stocks are cyclical in nature which means that at some times growth stocks will outperform value stocks and vice versa.  Therefore, both types of stocks have a place in most client’s portfolios.