Ask a Fool: Value Stocks and Growth Stocks -- What's the Difference?

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Q: I'm new to investing and keep hearing people talk about "value stocks" and "growth stocks." What do these mean, exactly?

A value stock is generally defined as that of a mature company with solid fundamentals, and that can be easily evaluated with metrics like the price-to-earnings ratio. A value investor's objective is to identify stocks that trade at a discount to their intrinsic value, with the goal of producing market-beating returns over time.

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Textbook examples of value stocks include Procter & Gamble, AT&T, and Walmart. Think well-established companies with relatively steady revenue. Broadly speaking, value stocks are typically less volatile than growth stocks and tend to hold up better when the economy sours.

On the other hand, a growth stock is generally defined as that of a company with an above-average revenue or earnings growth rate. Growth investors aim to identify the best long-term growth opportunities relative to their current valuation. Popular growth stocks include companies like Amazon, Netflix, and Tesla.

Having said all that, it's not always a clear-cut situation. Some companies can certainly fit into both categories. Just to name one example, it's rather easy to make the case that Microsoft belongs in both categories. The company is large and established, with steady revenue and earnings, but also has an above-average growth rate.

Here's a key point to know: You don't necessarily need to focus on one category or the other. There are varying degrees of growth and value, and several sub-categories within each one, such as small-, mid-, and large-cap stocks. The best strategy for a newer investor like yourself is to aim for a well-rounded portfolio with excellent companies of all kinds.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of T. The Motley Fool owns shares of and recommends AMZN, MSFT, NFLX, and TSLA. The Motley Fool is short shares of PG. The Motley Fool has a disclosure policy.