If you are confused by personal finance terms, jargon and calculations, heres a series to simplify and deconstruct these for you

Growth vs value investing: How two investing styles differ and what you need to know before opting for either In the 18th part of this series, Riju Mehta explains the difference between growth and value investing styles

Among the various investing strategies followed by market enthusiasts, a popular tussle is between growth and value investing. Success in either strategy depends on various factors and neither can be followed indefinitely, while many also choose a combination of both to elevate their portfolio performance. To decide which strategy is more suited to your risk appetite and aligned with your goals, find out how the two investing styles differ and what you need to know before opting for either.

What is growth investing?
This strategy involves focusing on companies that are growing at a much faster clip than the average stock in the market. They register high earnings and profit growth, and are likely to outperform their peers and the market. These stocks are valued much higher than their intrinsic value.

However, there can be a higher risk associated with growth stocks if they don't live up to expectations or the idea flops, especially if it's a new company with no history of performance or track record.

How to identify growth stocks

They have a very high growth rate compared to the average growth rate in the market.
They typically have strong revenue and earnings growth, and a positive cash flow. They also offer high return on equity (RoE).
They have high metric ratios like price to earnings (PE), price to book value (PB), and earning per share (EPS).
They offer very low or no dividends at all because they are typically small or new companies and reinvest their earnings for expansion and growth.

What is value investing?
According to this strategy, investors go for companies that are large and well-established with strong fundamentals, but are priced lower than their intrinsic value. This could be because of short-term developments that are likely to rectify themselves over time. Consequently, these stocks have the potential of giving good returns but could take a longer time as they inch slowly towards their intrinsic value.

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The risk in these stocks is much lower because these are usually older, bigger companies with strong fundamentals. So even if the target price is not reached, there is always the probability of capital growth.

How to identify value stocks

These companies have a track record of high earnings growth, free cash flow, and low debt to equity ratio.
They have low metric ratios like PE, PB and EPS. According to Benjamin Graham, PE should be less than 9, and PB less than 1.2.
Look for companies that have been offering dividends consistently.