Articles

Growth Vs. Value Investing: Which Style Suits You?

Read More" data-layout="standard" data-action="like" data-show-faces="false" data-share="true">

Growth Vs. Value Investing: Which Style Suits You?

When making your investment decision, do you lean towards growth funds or value funds? Let’s take a look at both to see which type suits you best! While both growth and value investing styles seek to provide the best possible returns for investors, the primary differences lie in the approach, the way stocks are picked, and the types of markets for which they are best suited.

Growth investing

A growth fund tends to focus on companies that experience faster than average growth as measured by revenue, earnings, or cash flow. Generally, growth-oriented companies are also more likely to reinvest profits in expansion projects or acquisitions, rather than use them to pay out dividends.

Investors focused on growth investing will keep an eye out for stocks with growth potential that focus on newer and expanding companies which are likely to rake in profits in the future, and higher than the industry or the market in general. When you invest for growth, you are looking at capital appreciation over the long term.

As growth funds are expected to offer higher returns, they also generally represent a greater risk. They tend to do better than the overall market when stock prices are rising, while underperforming the market as stock prices fall. Therefore, investing in growth funds may require a higher tolerance for risk and a longer time horizon.

Factors to consider when considering  a growth fund:

  • Is the company able to grow substantially faster than its competitors?
  • Is the company involved in a rapidly expanding industry (e.g. technology and healthcare, etc.)?
  • Are you comfortable with profits being realised through capital gains instead of dividends?
  • Can the fund achieve above average valuations such as high price-to-book and/or price-to-earnings ratios?

Pros and cons of growth investing

ProsCons
Able to realise substantial returns in a shorter time spanMarket downturns tend to significantly affect growth stocks significantly
Would potentially generate a good income stream if the growth stocks’ dividends grow in tandem with rapidly rising earningsHigh expectations of companies’ prospects increase the probability of disappointment if the company does not meet investors’ expectations
 The absence of a large margin of safety increases the probability of losses

Value investing

The goal of a value fund is to find the ultimate bargain. For example, stocks that have low prices in relation to factors such as earning, sales and net current assets of the company. A value investor will seek to buy stocks that are temporarily out of favour or at a bargain price. The value investor does so because he predicts that the share price will eventually return to a higher level when the stock comes back into favour, and the market will then drive the stock prices back up. Value investors usually do not follow the crowd, preferring instead to focus on a company’s fundamentals and take advantage of the market’s overreaction to negative sentiment.

There are various reasons why stocks become undervalued in the market. Sometimes, a company or industry could be going through hard times due to a fluctuating or a poor quarterly earnings report, negatively affecting its stock price for the short term. In this case, the value investor will look for a “margin of safety”, meaning that the market has discounted a security more than its market value, for example trading at a price less than its intrinsic value. Buying at a good bargain ensures that if the investment value drops, the losses will be minimal.

In general, a value fund will invest in mature companies that use their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, although they also offer the potential for long-term appreciation if the market recognises the true value of the stocks in which they invest.

Factors to consider when considering investing in a value company include:

  • Does the company’s business make long-term sense (e.g. financial services and utilities)?
  • Can the company’s stock be bought at a discounted rate?
  • Does it have a low price-to-book and/or price-to-earnings ratio?
  • Does it have a high dividend yield?

Pros and cons of value investing

ProsCons
Reduces probability of a large loss by purchasing equities with a high margin of safetyIf a downtrend occurs, the shares may continue to become cheaper and cheaper (trading at less than intrinsic value)
Goes against the grain i.e. not following the crowd, where “hot tips” and fads do not impair investors’ judgementIntrinsic value is subjective, two analysts can analyse the same company and derive at a different value
May provide consistent returnsMay yield lower returns on an annualised basis

The best of both worlds

So, which style of investing would suit your portfolio best? Well, the experts say that every investor’s portfolio should contain a combination of both.

As investors, employing a single approach only when investing over a long period of time may not be the best idea. Instead of choosing only one approach, an investor should strive to maximise returns while minimising risk by combining both growth and value investing.

This approach would allow investors to potentially gain whether the general market situations favour the growth or value investment style. These two types of stocks also tend to move in the opposite direction to a certain extent, so investors can enhance their potential for returns and reduce risk by combining the two approaches. Value funds offer investors more protection during sell-offs, while growth funds tend to lead during market rallies.

The wise investor knows and understands the differences between the two, but the wisest investor knows that a portfolio built around both growth and value stocks is the true path to investing success.

You don’t need to have thousands of Ringgit lying around to start investing. Start investing with as little as  RM1,000!

https://www.imoney.my/articles/growth-versus-value-which-investing-style...

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].

Investor's Guide to Exchange-traded Funds

Read More" data-layout="standard" data-action="like" data-show-faces="false" data-share="true">
What is an ETF? Generally, exchange-traded funds (ETFs) are index-tracking funds that are listed and traded on a stock exchange like stocks.

What is an ETF?

Generally, exchange-traded funds (ETFs) are index-tracking funds that are listed and traded on a stock exchange like stocks.

What are the key features of an ETF?
In general, an ETF has the following features:

  • Index tracking
    An ETF is designed to track performance of an index (e.g. KLCI, bond index, etc.)
  • Exchange trading
    An ETF is structured as a unit trust while it is also tradable on the stock market, i.e Bursa Malaysia like stocks, during the usual trading hours. Investors can buy or sell ETFs through their licensed stockbrokers anytime during trading hours
  • Fees and charges
    There are two types of fees and charges, i.e the fund management fees (management fees and other administrative costs) and trading costs. The fund management fees are usually deducted from an ETF's assets, and its net asset value (NAV) will be affected accordingly. Trading ETFs on Bursa Malaysia will also incur transaction costs, such as brokerage fees, stamp duty, etc.
  • Net asset value and trading price
    Each ETF has a NAV that is calculated with reference to the market value of the securities held. However, the trading of ETFs on the Bursa Malaysia, like that of a stock, is determined by the demand and supply of the market. Investors must bear in mind that the trading price of an ETF may not be equal to its NAV.
  • Dividend entitlement
    An ETF may or may not distribute dividends, depending on its dividend policy.
  • Regulated fund
    Like any other authorised funds, an ETF has to comply with the relevant regulatory requirements imposed by the SC. Investors must note that the SC's authorisation does not imply its endorsement of any particular product.

 


 

How an ETF unit is created?

Risks vs benefits

BENEFITS

RISKS

Easy to trade
An ETF is tradable through licensed brokers anytime during trading hours and is settled in the similar way as stocks/shares.

Market risks
An ETF is exposed to the economic, political, currency, legal or other risks inherent in a specific sector or market that affects the performance of the index being tracked by the ETF.

Low cost
An ETF is traded in board lots which are usually maintained at an affordable level. It also offers a wide array of securities for a minimum investment.

Tracking error
This refers to the difference between the performance of the ETFs (as measured by its NAV) and the performance of the underlying index. Depending on a particular ETF's strategy, it may not hold all the constituent securities of an underlying index in the same weightings of the index. Therefore, the performance of the securities underlying the ETF may outperform or underperform the index and this will be reflected in its NAV.

Diversification
By investing in an ETF, you can replicate the gains and losses of the basket of securities it is designed to track without incurring the expense of buying all the underlying securities yourself.

 

Liquidity
An ETF is continuously traded on the exchange during trading hours.

 

Transparency
The underlying index and constituent securities of an ETF are transparent, and price quotations are disseminated during trading hours. In addition, trading information of an ETF is easily accessible on a real-time basis.

 

Risks vs benefits
Before you invest in an ETF, read the prospectus and pay close attention to the following:

Information about the index that the ETF is tracking (e.g: KLCI, bond index, etc.)

  • The ETF's investment objective and strategy
  • The fees, charges and trading costs borne by the investor
  • The ETF's dividend policy
  • Information on the management company
  • The channels through which trading information of the ETF will be made available or disclosed.

After reading the prospectus and other relevant materials, and considering your investment objectives, risk appetite and the amount of funds available, you can then decide whether the ETF is suitable for your investment needs.

Reference: http://www.bursamalaysia.com/

© Securities Commission Malaysia (SC). Considerable care has been taken to ensure that the information contained here is accurate at the date of publication. However no representation or warranty, express or implied, is made to its accuracy or completeness. The SC therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. The information provided is for educational purposes only and should not be regarded as an offer or a solicitation of an offer for investment or used as a substitute for legal or other professional advice. For enquiries regarding sharing, republishing or redistributing this content please write to: [email protected].