Differences Between Income, Growth & Value Shares

Differences Between Large, Mid, & Small Cap Shares

 

Investing in the share market is one way to build your wealth, but how do you know what stocks to invest in? To answer this age-old question, the first step is to learn about the three types of shares: income, growth and value.

These investing styles are very different. Understanding the characteristics of each type of stock could help you to choose shares that match your financial risk profile and goals.

Okay, let’s break down each share and discuss who they may suit.


What are income shares?


These stocks are often the most stable of the bunch. They tend to perform consistently well, and reliably pay out dividends to their shareholders.

While you can find these kinds of stocks in any industry, most top income shares sit in mature industries with steady revenue and slow growth. Think utility companies: customers need electricity, but their usage doesn’t change much year-on-year. So, shareholders may earn reliable and regular dividends payments, but don’t expect a lot of growth.

Australian banks, real estate investment trusts (REITs) and telecommunications companies (like Telstra and Optus) are other examples of income stocks. They’re financially sound with limited growth options for the future, so they may also need less ongoing capital investment. This means any excess cash flow from their profits can be routed back to investors’ pockets in the form of dividends.


Who are income shares best for?


Investors who want to boost their fixed-income portfolios with relatively low-risk, high-dividend assets. The dividend yields are often generous, and potentially higher than assets like term deposits and bank accounts. As the saying goes, slow and steady wins the race!

Income shares are also useful if you’re close to retiring and looking for ways to replace your salary. Dividends are typically paid out in cash on a half-yearly, quarterly, or monthly basis.


What are growth shares?


If “go big or go home” was a trading strategy, growth shares would be the stocks to invest in.

As the name suggests, growth shares could be on the brink of significant growth. They’re expected to grow quickly in terms of revenue, cash flow and profits, and could potentially outperform their competitors by a large margin.

They can be small-, mid- or large-cap companies, either with a product or range that’s expected to sell well, or a management style that will give them an edge in the market. With the potential for growth and returns, you can think of them as the next big thing. You can find growth companies in every sector of the market, and especially in technology and alternative energy.

Since these stocks are all about growth, companies’ direct earnings into their own expansion, investing in more staff and equipment as well as product research and development. As an investor, you probably won’t get high dividends from growth stocks (and possibly none at all). But that’s not why you’re investing. Your goal is to get in on the best growth shares, and then sit back while they skyrocket, and sell your stocks later at a high profit.


Who are growth shares best for?


Investors with a high risk profile as well as the time and patience to wait for the stock to potentially soar. In short? Those with a medium to longer-term investment horizon.

Growth stocks may be poised to continue expanding and delivering profits, but they might not have a long history of strong earnings growth. This means there are no guarantees, and stocks could fall sharply if any negative news about the company emerges. The potential for higher volatility makes them more suitable for risk-tolerant investors.


What are value shares?


If growth shares are the hyped-up stocks, value shares are the hidden gems. These companies fly under the radar because their share prices often don’t reflect their fundamental worth, so they’re potentially a bargain for investors.

Investors shouldn’t don’t buy blindly, though. They should consider stocks the market has underestimated or ignored, but have the potential to appreciate in value over time. These financially strong companies tend to have low P/E ratios and stock prices below the competition, but they experience small gains in revenue and earnings over time. They’re often stable, with predictable business models, making them a less risky investment.

Value stocks are often large, well-established companies that are trading below the price analysts believe the stock is worth. For example, the share price may have dropped due to a CEO resignation. But it may fully recover as a new appointment proves themselves. For value investors, the initial sell-off could be the perfect entry point.

Value shares often pay out dividends, providing a stream of income for investors. The goal is to purchase these stocks while they’re undervalued, and wait for them to increase in price before selling them.


Who are value stocks best for?


Conservative investors with a low risk profile and an eye for finding diamonds in the rough. Value shares often have good fundamentals, but they’re fallen out of favour in the market, so it’s up to investors to recognise their future potential.

Value shares may also be ideal for investors who want less volatility, and new traders who are looking to buy inexpensive stocks.


Learn how to buy shares that suit your investing style


It’s hard to say which style of investing is “best,” because it comes down to your investor risk profile and goals. Income, growth and value shares all have their merits, and learning how to trade them properly could help maximise your profits.

Motion Trader identifies opportunities from across the three categories. This could help you build a balanced portfolio with the aim of maximising your returns. Our system tracks every ASX stock (excluding EFTs and LICs) and uses algorithms to identify trends in share prices. This information could help you select the best ASX shares to buy now before many people are even aware of them.

If you’re ready to create a profitable share portfolio, contact our team today. And if you want to teach yourself about shares, register for our free video training today!

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 

Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.