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With the rising inflationary costs of living and the daily challenges of parenting young children, it’s only natural to wonder how we can make our money work harder for us. As parents, there’s always a growing list of expenses that seem to pile up—from school fees, health insurance, and dentist visits, to the unexpected surprises like a fridge or washing machine breaking down. Let’s not forget about the costs of children’s hobbies, vet and hospital visits, and the need to save for family holidays to create lasting memories.
And then, there’s the bigger picture—saving for our children’s future, including university tuition, helping them with their first car, and potentially contributing towards their first home deposit. With all these financial pressures and the constant cost-of-living increases, we can often wonder how we’ll be able to manage and plan for these future expenses, let alone make significant savings.
Investing in the stock market offers great potential for building wealth and securing financial stability for the future, but it also comes with its own set of uncertainties—especially in today’s unpredictable economic environment. The decisions we make can feel daunting, as we try to balance day-to-day living with long-term financial goals.
So, how can we make smart investment choices while managing the daily demands of life, and how can we start to work towards the financial future we dream of for our children without adding more stress? In this article, we’ll take a closer look at growth and value stocks—two key investment options that can help build long-term wealth. We’ll explore what they are, their benefits, and their risks, offering you a clearer picture of which option might be right for you, even in these challenging times.
One of the first decisions to make is whether to invest in growth stocks or value stocks. Both offer unique opportunities for wealth generation, but they also come with their own risks. Understanding the differences between the two can help you navigate this decision with confidence.
In this article, we’ll explore growth and value stocks in more detail, highlighting their key benefits and potential pitfalls. This way, you can make an informed decision and choose the investment style that aligns best with your financial goals and the realities of managing a family budget.
What is the stock market?
Before discussing growth and value stocks, it is worth clarifying what exactly the stock market is for those who are not familiar with it.
Essentially, as implied by its name, the stock market is a marketplace that allows individuals to buy and sell shares in public companies. One example of this is the Westpac share price.
The main purpose of doing so is that it enables private investors to own a small stake in the business and benefit from the dividends (aka profits) it makes over time.
At the same time, for the listed companies, it helps them to raise capital via investors which they can use to further expand their business.
In different countries, shares are listed on a specific marketplace, for instance, the Australian Securities Exchange (ASX) in Australia, and the London Stock Exchange (LSE) in the UK.
Companies who want to sell off stocks on an exchange must apply to become ‘listed’. If they are approved, they need to adhere to the rules and guidelines set out by the country’s financial services regulatory institution. In Australia’s case, this is the Australian Securities and Investments Commission (ASIC).
What Are Growth Stocks?
Growth stocks are shares of companies that are expected to grow at a faster-than-average rate compared to the overall market. In an effort to do this, organisations often reinvest their earnings into expansion, research, and development rather than paying dividends to shareholders.
Generally speaking, companies offering good growth stocks tend to show rapid revenue and earnings increases, often within sectors like technology, healthcare, and e-commerce.
Additionally, growth stocks usually trade at high valuations because investors are willing to pay a premium for future earnings potential. Some examples include Amazon, Tesla, and Shopify.
Pros and Cons of Growth Stocks
Growth stocks can be a valuable investment because they have the potential for high capital appreciation, can benefit from market trends and innovation, and the companies that offer them tend to strengthen their position in the marketplace by reinvesting their profits for future growth.
On the flip side, growth stocks do come with higher volatility and risk, can be overvalued with high P/E ratios, and provide income-seeking investors with no or low dividends.
What Are Value Stocks?
Value stocks are shares of companies that are considered undervalued based on their financial fundamentals. Subsequently, they are often overlooked by the market and trade at a lower price compared to their intrinsic worth.
Often found in industries like banking, manufacturing, and consumer goods, they tend to be priced lower relative to earnings and assets. However, investors who buy value stocks do so, believing that their price will eventually reflect their true worth.
Some examples of value stocks include those offered by Coca-Cola, JPMorgan Chase, and Procter & Gamble.
Pros and Cons of Value Stocks
One of the primary reasons to invest in value stocks is that many companies that offer them distribute dividends to reward shareholders, which can provide a good passive income. Additionally, they are seen as less volatile and therefore, a lower risk for investors as compared to growth stocks.
At the same time, their overall growth potential might be limited and the stocks can remain undervalued for long periods. They also may underperform in markets that are booming.
Growth vs. Value: Which Performs Better?
The debate over growth versus value stocks has been ongoing for decades and as historically, their performance has shifted depending on economic conditions, interest rates, and market cycles, it is yet to be definitively answered.
Typically, growth stocks thrive in low-interest rate environments because when interest rates are low, borrowing is cheaper, which makes it easier for companies to expand.
By contrast, value stocks shine in uncertain economic times, particularly signalled by rising interest rates, because investors often prefer stable, dividend-paying companies.
Interestingly, some studies have shown that value stocks have outperformed growth stocks over long periods. However, in the past decade, growth stocks have started to dominate, thanks largely due to the rise of major and hugely successful technology companies like Apple, Amazon, and Google.
Which Investment Style is Right for You?
For any investor, the choice between investing in growth or value stocks depends on factors like the amount of risk you are prepared to take, your financial goals, and which ones you have more trust in.
While you should always research fully what is right for you, growth stocks may be best if you are looking to make a long-term investment, prefer capital appreciation over dividends, and can tolerate a high level of volatility.
Value stocks, on the other hand, might be a more appropriate solution for those who want a passive income from dividends to help with the rising cost of living, would rather have a lower risk in their investment, believe that the market currently undervalues certain stocks and shares and that they will eventually rise.
