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What's the difference between value and growth stock investing strategies?

Value Strategy

The value strategy attempts to find shares of companies that represent good value -- value stocks. These would be stocks with prices that are lower than comparable companies, perhaps because the shares are out of favor with investors. Eventually, value investors figure, the market will recognize the true value of the stock and run up the price. People who use this approach are sometimes called fundamentalists because they focus on the fundamentals of the company. Measures of value may be a company's earnings, book value, revenue or brand recognition.

Risks:   Generally, value investing is less volatile than growth investing; since the price of these stocks is already low, the potential downside -- of further declines -- is low.

How returns are made:   A combination of current dividend yield and capital gains.

How it performs over the business cycle:   Tends to work best in down markets, with some participation in up markets

Growth Strategy

The growth strategy, on the other hand, tries to find shares of those companies whose earnings are growing and will continue to grow rapidly. They are called growth stocks because their earnings are growing at a faster rate than the overall market. The company's stock price is increasing along with those earnings, too. People who believe in this strategy are sometimes called momentum investors.

Risks:   If the company's earnings per share falls, that tends to cause a big drop in the value of growth stocks. They are volatile when actual earnings per share are reported above or below what analysts predicted, and vulnerable to market cycles.

How returns are made:   Mainly through capital gains, with low dividend income.

How it performs over the business cycle:   Tends to outperform in an up market, generally hit harder than the overall market in down markets.