What Exactly Is the Difference Between Growth and Value Stocks?

Simply put, growth stocks are stocks of companies whose revenue and earnings are growing significantly faster than the market average. Investors buy them mainly to bet on future share price appreciation (capital gains), not to earn dividends^[1]. These companies often reinvest profits into expansion and rarely pay dividends. Value stocks, on the other hand, are stocks that the market considers undervalued relative to their intrinsic value. Common signals include a low price-to-earnings (P/E) ratio or a high dividend yield. Investors bet that the market has 'wrongly punished' the stock and that its price will eventually return to a fair level^[2].

For example, Apple's current dividend yield is only about 0.35%, while a typical value stock like Coca-Cola has a dividend yield of 2.34%^[8]—one plows money into R&D and new products, the other generously distributes profits to shareholders. That's the most intuitive difference between the two styles. Imagine if you buy Apple, you hardly expect annual dividends; instead, you hope new iPhones and services will drive the stock price up. If you buy Coca-Cola, you might value the steady annual cash dividends, like collecting rent.

Here's another analogy: growth stocks are like planting fruit trees—high upfront investment, slow to bear fruit, but once mature, the yield can be abundant. Value stocks are like buying a discounted mature orchard—cheap, with a steady harvest every year. Of course, fruit trees can suffer from pests or bad weather, and orchards can lose value due to market changes, so both carry risks.

How Do Official Indexes Classify Growth and Value Stocks?

You might think growth/value is decided arbitrarily, but official index providers use rigorous scoring systems. S&P Dow Jones Indices uses three growth factors (3-year sales/earnings per share growth, momentum) and three value factors (book value/earnings/sales to price ratio) to score stocks, then assigns them to Growth or Value style indexes accordingly^[3]. In simple terms, growth factors look at a company's past and current growth momentum, while value factors look at whether the stock price is cheap relative to the company's assets and earnings.

FTSE Russell uses three indicators: price-to-book (P/B) ratio, 2-year expected EPS growth, and 5-year historical sales per share growth. Interestingly, a single stock can even be partially included in both growth and value indexes proportionally^[4]. So don't treat growth/value as black-and-white labels. For example, a company with decent growth and reasonable valuation might be half growth and half value.

This classification method is useful for investors because you can track these indexes to understand market style changes, or choose corresponding index funds to allocate. But note that different index providers use different methodologies, so the same stock may be classified differently across indexes.

What Are Some Representative Companies for Growth and Value Stocks?

The representatives of growth stocks are the 'Magnificent 7' in US stocks: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla. Their long-term earnings and revenue growth far exceed the broader market, making them core holdings in Growth style indexes and ETFs^[10]. For more details on these seven companies, check out our special topic on the Magnificent 7.

The representative figure for value stocks is Warren Buffett, whose Berkshire Hathaway is widely regarded as the benchmark of value investing, following Benjamin Graham's concepts of 'intrinsic value' and 'margin of safety'^[11]. Typical value stocks also include leaders in traditional industries like financials, energy, and consumer staples, such as Coca-Cola and JPMorgan Chase. These companies usually have stable earnings and generous dividends, but limited growth potential, and the market gives them lower valuations.

Note that representative companies are not set in stone. For instance, Apple and Microsoft, though currently seen as growth stocks, have been gradually increasing their dividend yields, indicating they are returning more cash to shareholders. So a company's style label can evolve over time and with its business strategy.

How Do the Risks of Growth and Value Stocks Differ?

Growth stocks typically have higher beta coefficients, making them more sensitive to market swings and more volatile. Lower-beta stocks (often value stocks) tend to be more defensive during market downturns but have less upside potential^[7]. In other words, growth stocks can make you rich overnight or make your heart race; value stocks are more like a steady old ox—stable but slow.

In terms of sector concentration, growth ETFs (like VUG) have tech weightings above 65%, with the top five holdings (Nvidia, Apple, Alphabet, Microsoft, Amazon) totaling nearly 47%. Value ETFs (like VTV), on the other hand, have their largest sector in financials (about 22%), with tech only around 15%, making the distribution more diversified^[9]. For more on sector classification, see our GICS 11-sector classification.

This concentration difference means growth stocks' performance is highly dependent on the tech sector's health. If tech faces a downturn, growth stocks may fall harder. Value stocks, being more diversified, are less affected by any single sector's volatility. Additionally, high volatility means growth stocks can cause greater psychological stress during declines, so it's crucial to assess your risk tolerance before investing.

Which Is More Profitable: Growth or Value Stocks?

There's no fixed answer. Academically, Fama and French's three-factor model found that over the long term, high book-to-market (value) stocks have higher average returns than low book-to-market (growth) stocks—the famous 'value premium' phenomenon^[6]. That is, historically, value stocks have actually outperformed growth stocks.

But in the last decade, AI-driven growth stocks have reversed this pattern. According to Morningstar, value stocks underperformed growth stocks by nearly 10 percentage points in 2024, but briefly overtook them in early 2025 (value index rose 4.5% in January vs. growth index 3.9%)^[12]. So styles rotate, and neither is permanently superior.

It's like fashion trends—sometimes bell-bottoms are in, sometimes skinny jeans. Investment styles also shift with economic cycles, technological changes, and market sentiment. So rather than guessing which style will win, understand their characteristics and allocate based on your goals and risk preferences.

How Should Ordinary Investors Choose Between Growth and Value Stocks?

If you can tolerate high volatility and are bullish on long-term tech trends, growth stocks or growth ETFs might suit you. If you prefer stable dividends and dislike big swings, value stocks or value ETFs are more prudent. But remember, they're not mutually exclusive. Many investors use the GARP strategy (Growth at a Reasonable Price), specifically looking for companies with 'fast earnings growth but not overly inflated valuations'^[13].

As for choosing between index funds and active funds, check out our guide on index vs. active funds. Remember, there's no 'best' style—only the one that fits you best.

Additionally, you can use the PEG ratio to help judge whether a growth stock is reasonably priced. PEG = P/E ratio ÷ expected earnings growth rate. A PEG of around 1 is generally considered reasonable; significantly higher may mean growth expectations are overpriced^[5]. For example, if a growth stock has a P/E of 30 and expected earnings growth of 30%, the PEG is 1, indicating the valuation matches growth. If growth is only 10%, the PEG is 3, suggesting it might be too expensive.

Can You Have Both Growth and Value Stocks?

Of course. Besides the GARP strategy, you can also allocate to both growth and value ETFs, or choose funds that cover both styles. Additionally, the same stock can be included in both growth and value indexes (as with Russell's method)^[4], so 'having both' is entirely feasible mechanically.

The key is to understand the risk-return characteristics of each style and rebalance regularly. For example, you can set a target allocation like 60% growth and 40% value, then adjust once a year to bring the proportions back to the initial state. This way, you enjoy the upside potential of growth stocks while reducing overall volatility through value stocks.

Style rotation is the norm, and there's no one-time allocation that lets you win forever. Instead of betting on a single style and guessing the winner, rely on portfolio allocation and regular rebalancing to turn the pressure of 'guessing the style' into the certainty of 'disciplined execution.'