Growth stocks are companies with great potential for future growth and development. As a result, their prices may increase at a higher pace than other stocks. Investors evaluate the growth in terms of profitability, cash flows, funding (government and private sector), partnerships, products or services, and market expansion. Historically, growth companies don't pay dividends to investors and reinvest most of the profit for further growth and expansion. Growth stocks are usually more expensive and riskier. A few examples of growth stocks are Amazon, Facebook, Apple, Netflix, and Etsy.
Value stocks are undervalued companies with great business fundamentals. Therefore, their current price does not reflect its intrinsic value. Value investors such as Warren Buffett purchase these value stocks at bargain prices that are lower than their real values. Therefore, they expect positive returns over time as the market recognizes its true worth. Historically, value companies pay dividends to investors. Value stocks are usually less expensive and less risky. Furthermore, they are more common among big-cap and established companies. A few examples of value stocks are Berkshire Hathaway, Procter & Gamble, and Johnson & Johnson.
Growth stocks and value stocks offer their own advantages and disadvantages. A reasonable portfolio is a combination of both growth stocks and value stocks. Eventually, investing in these stocks depends on the type of industry, investment goals, time period, and risk tolerance of investors. Generally, growth stocks perform better during bull markets (economic expansion), and value stocks outperform during the bear market (economic downside). Growth stocks are riskier, but they offer higher rewards if the company's growth proceeds as planned. Value stocks offer dividends and are less risky.