In the business world, stock refers to what a company owns as a result of giving shares to individuals. It can also mean the number of shares that one holds in a particular company. There are several types of stocks as learned in the course, one being the growth stocks (Growth Stocks vs. Value Stocks, n.d.). As the name suggests, concerning this kind of stock, the expectation of growth is expected to be above the average rate in comparison to what the market is offering. It attracts many investors because it is a dream of any investor to make a huge profit, making it to be widely known as a glamor stock. Due to the nature of this type of stock, many companies, especially technology companies, do not sell their shares but retain them in capital projects (Growth Stocks vs. Value Stocks, n.d.). The other kind is known as the value stock that, unlike the growth stock, trades at a lower price than its dividends, making it unfriendly to investors due to the low-to-price earnings ratio. An investor with this kind of stock always tries to find companies that would at least trade the shares less than they are worth for him or her to make profits out of them. The main difference between these two lies entirely in the market regarding how investors perceive them (Growth Stocks vs. Value Stocks, n.d.).
The collection of financial assets, such as money, in business, is referred to as a portfolio that may be managed by either investors or financial institutions. A portfolio is designed to be investor-friendly in terms of objectives, time, and profit margins. Therefore, when developing a portfolio, all factors that would lead to profit-making and reduction of risks are adopted (Kim & Shamsuddin, 2008). Portfolio selection by investors in these two types of stocks would tend to favor one more than the other, given what has been discussed about the creation of a portfolio. Investors’ interest is crucial, and profit-making should be a top priority, making the growth stocks to be a priority due to their sound perception by investors (Wachter, 2013). When investors go for growth stocks, they have particular things they consider, such as the ability to grow, which is the primary feature of this approach. Investors who opt for the stocks are those who believe that the other kind of approach is undervalued in the market, making them have more risks of incurring losses. Some other investors have different ideas on the same issue, opting for value stocks. They believe that due to the fact that the stocks are undervalued, they would be readily available at a lower price, making them get small profit margins but at very high frequencies. Other investors find it a good idea to combine the two, keeping them at a balance that promotes continuity of business.
Overall, growth stocks have a better chance of business survival than value stocks because, regardless of the economic conditions, companies struggle to achieve high growth based on their earning history. Value stocks, on the other hand, lack favor from investors because they have a negative reputation (Kim & Shamsuddin, 2008). Their value may be boosted by incorporating new firms that other investors have not learned about yet (Growth Stocks vs. Value Stocks, n.d.). The primary measures used to differentiate value and growth stocks. There are two approaches that are important in portfolio selection as investors are aware of what to expect and how to trade, depending on the method they have chosen (Wachter, 2013).
Sudatel, a company in the telecommunications sector in Sudan, is a good example of value stocks. The government majorly owns the company. In fact, private investors own only less than half of its shares. The main function of this company is to construct and uphold the country’s telecom infrastructure. Sudatel fits to be in value stocks because of its small ratio on share per earning and the fact that investors seem not to be interested in buying its dividends. As discussed above, companies with stock values do not attract investors that have set objectives of making the biggest profit possible with each transaction.
National Bank of Bahrain (NBB), on the other hand, is a good example of growth stocks, owing to the significant shareholders that include not only the government. The bank is quite old, having been established almost fifty years ago, and it was the first local bank in Bahrain. Over several years, the bank has registered such a big growth, including opening over twenty branches around the country and several internationally. It is one of the leading providers of financial services in the country, and this would attract many investors, making the company’s interest go high. As discussed above, investors in growth stocks do not trade them at any rate, preferring to reinvest them to maximize their growth trends. Therefore, investors, as discussed above, in their preparation for a portfolio, would prefer NBB to Sudatel due to its strong growth record in the market. Some other investors would also prefer to combine the two to avoid unnecessary risks of failing to meet their objectives.
References
Growth Stocks vs. Value Stocks. (n.d.). Web.
Kim, J. H., & Shamsuddin, A. (2008). Are Asian stock markets efficient? Evidence from new multiple variance ratio tests. Journal of Empirical Finance, 15(3), 518-532.
Wachter, J. A. (2013). Can Time‐Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility? The Journal of Finance, 68(3), 987-1035.