My understanding of growth stock v/s value stock is below: *Growth stocks have higher MPS than their EPS ;Value stock is vice versa * Growth stocks are ’ hot picks’ that they publish in market dailies, ; value stocks are mature companies that have ceased to grow beyond a point, but pay regular dividends. *Growth stock investing is for short term horizon, value stock investing is what Warren Buffet does ( long to very long term) I read a distinction on http://www.investorwords.com/5841/value_fund.html , which is confusing to me: The Value funds are interested in safety of money, then why do they look to invest in the “stocks that have fallen out of favor with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry” My confusion is that won’t such investments have high risk of losing your money alltogether if company didnt turn up profitable . In that sense, i think value fund is more acting like a venture capital? Your comments Thanks
Try not to rely on definitions outside of CFAI text because it can confuse you further. Often CFAI definitions differ from how others perceive the topics. When comparng value versus growth investing, these type of “growth” investments are not consistent with how CFAI defines a growth stock. I think the paragraph on page 160 of the CFA text clears this up nicely.
As I understand it, CFA considers a growth stock to be stock in a COMPANY that’s growing not a stock whose price is expected to go up. Value stock is stock that is undervalued by the market for a variety of reasons, including a lack of a strong following by analysts.
resolute Wrote: ------------------------------------------------------- > As I understand it, CFA considers a growth stock > to be stock in a COMPANY that’s growing not a > stock whose price is expected to go up. Value > stock is stock that is undervalued by the market > for a variety of reasons, including a lack of a > strong following by analysts. Straight from the CFAI text.
I could understand ‘Value Stock’ in a better sense, when I read it in L2. Let me share it with you. Any stock has an ‘Intrinsic Value’. Which is the present value of all FUTURE cash flows that are to be generated from that asset (stock). If this ‘intrinsic’ value is higher than the market price, it is a ‘value stock’. Issues are: 1. Since you can only estimate the Intrinsic value by estimating future cash flows from that stock, your estimates can be different from mine and thus your ‘estimated intrinsic value’ could be different from how others are estimating it. This is where quality of analyst comes to forefront. 2. If your estimated intrinsic value is more towards the actual intrinsic value, and the stock is undervalued based on your estimated intrinsic value, you win on that position in longer run, when others realize it and market price finally converges towards that intrinsic value. But, this is not part of L1 material. I am posting it if it may help you better understand the concept of ‘Value Stock’.