Growth vs Value Stocks
Growth stocks belong to companies whose earnings grow faster than the market average and usually trade at high valuations. Value stocks trade below what their fundamentals suggest, often with low P/E ratios. The two styles tend to take turns leading the market.
Investors broadly split stocks into two camps: fast-growing companies people will pay up for, and unloved companies that look cheap. Each style has long periods of leadership and long periods of pain. This entry explains how to tell growth from value, how each behaves and how investors use the distinction.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Growth stocks, Value stocks, Growth investing
- Updated
Growth and value in plain words
Growth stocks have earnings growing faster than the market average; value stocks have low price-to-earnings ratios, making them cheaper to buy.1
A value stock's low P/E may reflect that it has fallen out of favour with investors for some reason.1
Value stocks are often described as trading below their intrinsic value — in other words, undervalued.2
How to tell growth from value, step by step
Check earnings growth
Well above average suggests growth. See Earnings per Share.
Check the P/E
High for growth, low for value. See Price-to-Earnings Ratio.
Check price-to-book
Value stocks often trade near book value. See Price-to-Book Ratio.
Check dividends
Value stocks pay more; growth reinvests. See Dividend Yield.
Check the business
Expanding markets vs mature ones.
Use style indexes
Index providers classify stocks by style. See Stock Market Index.
Worked examples
Example 1 — P/E comparison
Growth vs valueCompany G trades at $150 with EPS of $3. Company V trades at $40 with EPS of $4.
| Company G P/E | $150 ÷ $3 = 50 |
| Company V P/E | $40 ÷ $4 = 10 |
Value stocks have low P/E ratios; growth stocks usually carry much higher ones.1
Example 2 — Growing into a valuation
Valuation shrinksCompany G's EPS grows 30% a year for 3 years from $3.
| EPS after 3 years | $3 × 1.3³ ≈ $6.59 |
| P/E at $150 | $150 ÷ $6.59 ≈ 22.8 |
Growth companies generate earnings faster than average, which can shrink a high P/E over time.2
Example 3 — A value trap
Cheap got cheaperCompany V's earnings fall from $4 to $2, while the price drops to $30.
| New P/E | $30 ÷ $2 = 15 |
| Price change | −25% |
A low P/E can reflect real problems rather than a bargain.
Growth vs value stocks
| Aspect | Growth | Value |
|---|---|---|
| Earnings growth | Above average | Average or below |
| Valuation | High P/E | Low P/E |
| Dividends | Low or none | Often higher |
| Sensitive to | Interest rates | Economic cycle |
How investors use the distinction
Style allocation
Balancing both styles. See Diversification.
Factor investing
Tilting toward value or growth. See Factor Investing.
Rate cycles
Growth often suffers when rates rise. See Interest Rate.
Benchmarking
Comparing funds with the right style index. See Benchmark.
Advantages and disadvantages
Advantages
- Growth: exposure to fast-expanding companies.
- Value: buying fundamentals at a discount.
- Mixing both diversifies style risk.
Disadvantages
- Growth: high expectations can disappoint.
- Value: cheap stocks can stay cheap.
- Style leadership can last for years either way.
Going deeper
Read as far as you need. Each level builds on the one before it.
Overlapping categories
Beginner
Stocks can fit several categories at once; a value stock can also be a growth or income stock.1
Why rates matter
Intermediate
Growth companies' profits lie further in the future, so higher discount rates cut their present value more. See Discounted Cash Flow.
Intrinsic value
Advanced
Value investing rests on estimating intrinsic value and buying below it; growth investing pays up for expected future earnings.2 See Margin of Safety.
Common mistakes
Assuming low P/E means cheap
Earnings may be falling.
Paying any price for growth
Valuation still matters.
Ignoring style drift
Funds can change style over time.
Chasing last year's winner
Leadership rotates.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Growth stocks grow earnings faster than average.
- Value stocks trade at low valuations.
- Growth is rate-sensitive; value is cycle-sensitive.
- Styles take turns leading.
- A low P/E can be a trap.
Frequently asked questions
Which is better, growth or value?
Can a stock be both?
Are tech stocks always growth stocks?
Further learning
- Price-to-Earnings Ratio
The main valuation gauge.
- Factor Investing
Value and growth as factors.
- Margin of Safety
A core value-investing idea.
- Price-to-Book Ratio
Another value measure.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Stocks – FAQs (opens in a new tab) Checked .
- Corporate Finance Institute. Growth Stocks vs Value Stocks (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.