THERE are many different ways to invest in the stock market. As a part of your investment strategy it is ideal to ensure that before making any investment decisions, there is an outline of your investment objectives/timeline in aiding towards making strategic and prudent investment decisions.

This is very important as it helps to make your choices much easier and thereby assists you in avoiding irrational choices.

Also, with a wide variety of stocks available on the market, trying to figure out which ones suit your investment priorities or style of investing can be a challenging task; as a result many people seek professional assistance.

There are two fundamental approaches in choosing a stock that may be worth investing in. These are: value and/or growth stock/investing.

When deciding which method works better for you it is important to consider how serious and disciplined you are in keeping to a specific investment approach, although a strategy which involves a combination of both can be applied.

Value stocks are those that are effectively trading below the value that they are truly worth. In other words, these are stocks trading at a discount or a bargain. Some investors consider this as getting value for their investments because the stock appears to be trading at a cheaper rate and does not reflect that of the company’s intrinsic value.

You might be wondering what would cause a stock to be trading at less than its actual value. Well, there are quite a few reasons that could explain this. The company may be struggling with business challenges such as legal problems, changes in government policies and regulations, management difficulties, or possibly tough/increased competition that might cause it to be overlooked by other investors.

During times like these, a value investor believes that the share price will eventually increase to reflect what he/she or experts perceive as the stock’s true value. This strategy also takes into account a company’s prospect for turnaround. Therefore, a company being faced with business challenges will sometimes be considered an opportunity to determine whether or not it is a good opportunity to purchase a stock. This is usually influenced by a company’s valuation and other indicators that will reveal a company’s true potential.

Growth stocks are shares of a company that are expected to increase at a rate above average relative to that of the market. Growth investors look for companies whose earnings are rapidly increasing. You will find that most of these stocks are of newer companies in emerging (growing) economies, with innovative products that are expected to do well on the market. These are usually attractive to growth investors because they have great potential for expansion and price appreciation which can provide substantial returns on capital.

Again, you might be wondering, why purchase a stock that has been constantly increasing and how would you know if this trend will continue? In this case one could investigate to find out what plans the company is putting in place in an effort to continue offering new/innovative products to the market: Are their sales and earnings increasing from quarter to quarter and year to year? How is the industry performing overall? Is the volume of trading in the stock increasing or is the stock reaching/exceeding its new target prices?

With this strategy you will find that growth investors tend to be less concerned with a stock’s valuation. But at the same time they are faced with the challenge of trying to avoid overpaying for a stock in anticipation that the company might not perform and earnings might eventually turn out to be disappointing. For these reasons, individuals sometimes become sensitive and end up making decisions from a value perspective.

A company can be a growth stock at one point and later in its business life cycle become a value stock. It is important to keep informed in the market because at some point you might need to adjust your portfolio/strategy to keep aligned with market changes.

It always makes sense to diversify, because there is no absolute advantage to any single approach, especially if you are investing over the long term. Therefore, a strategy that includes a mixture of both investment approaches can be used to strive for the best possible return while minimising risk. This approach allows investors to potentially gain throughout economic fluctuations in which the general market situations favour either the growth or value investment style.

Value stocks are often stocks of cyclical industries, and tend to do well early in an economic recovery, while growth stocks tend to lead when the economy is performing, and are normally strengthened by falling interest rates and increased company earnings.

Nevertheless, the two groups of stocks are negatively correlated (move in opposite directions), which means investors can enhance return potential and reduce risk by combining strategies.

Examples of value stocks are companies like Grace Kennedy Limited (JSE:GK), Goldman Sachs Group (NYSE:GS) and Coca-Cola (NYSE:KO). These companies have in common a history of stable earning with high returns on equity and pay healthy dividends.

For growth, companies like Apple Inc. (NYSE:AAPL), Nike Inc. (NYSE:NKE), and Delta Airlines (NYSE: DAL) are great examples. Growth companies usually don’t pay large dividends but instead will either reinvest profits for further expansion, or to acquire new assets etc. In helping with your selection, an easy way to identify these is by looking at their historical earnings growth rate in comparison to their industry average to choose which ones best suit your investment objectives.

In closing, value investors prefer to buy stocks that are trading below their fair value while growth investors prefer companies that have tremendous outlook for growth and are less concerned with undervalued prices. A strategy which involves a combination of both can be applied. Either approach can be useful in making it easier for you to choose the right strategy for your investment portfolio.

Orick Angus is a financial advisor at Stocks & Securities Ltd.