Market participants buy stocks either for growth or income. It depends on their investment goals.
In this article, we will cover the difference between growth and income investing. You will also know when and why growth investing strategies are adopted in the stock market.
Growth investing
If you invest to grow your net wealth, then it’s known as growth investing. Which means, in growth investing investors expect their invested money to grow year after year.
Which is also known as appreciation in market value.
As a part of their growth investing strategy, investors pick up stocks with an expectation to grow their capital at a rate faster in relation to the overall stock market.
Growth stocks are securities of companies that have the potential of higher earnings than any average company. These companies are generally mid-cap and small-cap stocks with the opportunity to take market share of large cap stocks.
These companies generally do not pay dividends as they need to reinvest their earnings back into the company for expansion or new product launch. The incentive for investors is growth in share price.
Imagine you bought a stock for 10 rupees a share and now after 8 years, the market value is 80 rupees per share. In this case, you have gained 70 rupees per share in 8 years. In other words, your investment has a growth of 8 times.
Growth or appreciation is also referred to as capital gain. In our above example, you have a capital gain of 70 rupees per share.
Many valued investors pick their stocks with one thing in mind, capital appreciation. They also plan for the rate of return in capital invested.
Income investing
Some market participants prefer to have steady income in addition to less capital appreciation in market value. They prefer those stocks that perform consistently and pay dividends. It’s known as income or dividend investing.
As a part of your income investing strategy, you can invest in these stocks to get periodic dividends from the company.
Dividends are paid by companies quarterly or annually to those stockholders who are in the share register on the record date.
Blue-chip companies which are older and well established having a history of paying dividend are generally selected by investors looking for periodical income.
If your plan is to invest for regular income, then try dividend investing strategy.
Many market participants also use dividend capture strategy to make money.
Following three key indicators might help you in your income investing strategy;
- Payout ratio – dividend paid out of total earning in percentage.
- Dividend yield – how much dividend company paid for the market price of the stock.
- Dividend per share – dividend the company has paid per share.
In general, dividend paying stocks don’t have ability to increase the value of the stock as these are matured companies and don’t grow in size as compared to a growth stock.
However, they have great potential for capital gain compared to traditional fixed deposits and other risk free investments.
Some investors adopt both the growth and income investing strategy. In which they try to build a portfolio consisting of both growth and dividend paying stocks.
