When it comes to investing in stocks, two categories are the most famous: growth and value stocks. Think of them like ying and yang, they’re all part of the same thing (the stock market) but people tend to prefer one or the other. Understanding the differences between them is essential for any investor. In this article, we’ll explain what a value stock versus a growth stock is, provide examples of each type of stock, discuss how much of the S&P500 is value stock, and explain how you could decide if value stocks are right for you.

There are several ways that value stocks get assigned their label. Stocks are typically categorised as either growth stocks or value stocks based on their price-to-earnings (P/E) ratio. A company’s P/E ratio is calculated by dividing its current share price by its earnings per share (EPS).

There are subtle but important differences between the two. Growth stocks are typically those of companies that are expected to grow at a faster rate than the overall market. These companies usually have higher P/E ratios, as investors are willing to pay more for their potential growth. Growth stocks tend to be more volatile and riskier in the long run, but many investors are attracted to the potential for greater returns over time. Though that may not materialise.

Value stocks, on the other hand, are those of companies that may not be growing as quickly as the overall market. These companies typically have been in business for a number of years, they may have even fallen out of favour with institutional investors. But because they’ve been in business for a while, they tend to stay in business. And the best will continue to grow.

Examples of value stocks include blue chip companies such as Coca-Cola, Johnson & Johnson, and Procter & Gamble. These companies have been around for decades and have established track records of consistent performance. They also tend to pay out dividends regularly, making them attractive investments for income investors.

Other examples of value stocks include utilities such as Duke Energy or Southern Company, which provide essential services.

Roughly 24% of the S&P500 is made up of value stock. You can see exactly which ones by checking out the Pure Value Index.

Bear markets refer to periods of negative or declining stock market performance, often characterized by declining stock prices, economic uncertainty, and investor pessimism. For that reason bear markets are periods when markets tend to favour value stocks. Money moves from risky bets to ‘safer’ securities.

During bear markets, value stocks may be seen as relatively attractive investments because they may be less sensitive to economic downturns and market volatility. This is because value stocks often have lower price-to-earnings ratios and higher dividends, which can provide some cushion against falling stock prices. In addition, value stocks may be seen as more stable investments because they are typically associated with established companies that have a track record of generating consistent earnings.

Conversely, it is generally believed that growth stocks tend to underperform during bear markets compared to value stocks. This is because growth stocks are often more sensitive to economic downturns and market volatility, as their value is often based on the expectation of future growth rather than current earnings or dividends. In a bear market, investors may become more cautious and may be less willing to pay a premium for stocks with high price-to-earnings ratios.

So which type of stock is right for you? It depends on your investment goals.