Today we will learn about growth stocks and value stocks

when we discuss about value stocks, we need to learn a bit of fundamental analysis also — so it will be quite lengthy.

Hope you all remember the P/E ratio we learned last week, P/E = Price/EPS.

When you divide the P/E by the growth rate of the company, we get a new ratio called PEG.

For high-growth companies, the PEG ratio will be very high, and for low-growth companies — PEG will be less but a positive number.

If the PEG is negative, it means the growth rate is negative (the company is losing money). So unless you are that confident — never choose a firm with -ve PEG.

Growth companies usually have higher P/E and higher PEG and more people will be ready to buy them so the share price and valuation will be higher. Value investing means — finding mature companies that are trading at low valuations and holding for an ultra-long-term view, their PEG will be less, P/E also less.

A combination of growth + value picks is a good choice. Growth companies are not that reliable but will give higher returns and value companies are reliable and mostly won’t go bankrupt.