Lesson 16 – The Best Free Finance Course in History
Course index:
- Basic Concepts of Money and Personal Finance
Introduction to the value of money, the importance of saving, and spending control. - Budgeting and Financial Planning
Create a personal budget, manage income and expenses, and set financial goals. - Inflation and Purchasing Power
Explanation of how inflation affects the value of money over time. - Interest Rates and Time in Finance
Differences between simple and compound interest rates and their importance in investments. - How to protect your savings. Protect yourself from scams.
How to protect your money from the scams that abound today - Basic Savings Instruments
Explanation of savings accounts, term deposits, and how they work. - Introduction to the Stock Market
Basic concepts of the stock market and its role in the global economy. - Actions: What They Are and How They Work
Explanation of stocks, types (common and preferred), and how to invest in them. - Bonds: What They Are and How They Work
Differences between corporate and government bonds, and their importance in diversification. - Risk vs. Return on Investments
Concept of risk and how it affects investment choices. - Diversification and Creation of Basic Portfolios
Basic diversification principles to reduce risk in an investment portfolio. - What is an ETF and How Does it Work?
Introduction to ETFs (exchange-traded funds) and how they track market indices. - What is a Mutual Fund?
An explanation of mutual funds and their benefits for beginners. - Financial education for the family
All the information you need to make ends meet. - Economic Cycle and its Impact on Investments
How the stages of expansion and contraction in the economy affect investments. - Growth Stocks vs. Value Stocks <<<<<<<<<<<<<<<<<<<<<<<<<<<<
Differences between these types of actions and when each is appropriate. - Fundamental Analysis of Stocks
Explanation of how to analyze a company's value based on its fundamentals. - Basic Technical Analysis: Charts and Patterns
Introduction to basic technical analysis tools, such as trend lines and candlestick patterns. - Options: What They Are and How They Work
Basic concepts of call and put options and their uses in investments. - Futures: What They Are and How They Work
Introduction to futures contracts and their application in investment and speculation. - Introduction to Cryptocurrencies
What is digital money, how it was created, and the characteristics of Bitcoin and other cryptocurrencies. - Blockchain and its Importance in Finance
How the technology behind cryptocurrencies works and their applications in finance. - Risks in Cryptocurrency Trading
Volatility, fraud, and regulations in the cryptocurrency market. - Leverage Principles and its Risk
What it means to trade with leverage and the associated risks. - Investor Psychology and Emotion Management
How emotions influence investment decisions and tips for managing them. - What is Algorithmic Trading
Basic explanation of the use of algorithms to perform operations in the financial market. - Financial Analysis of Companies
Introduction to basic financial statements and their interpretation for valuing companies. - Investing in Commodities: Gold, Oil, and Other Goods
How commodity investments work and their role in diversification. - Advanced Investment Strategies: Hedging and Derivatives
Introduction to strategies for managing risks through financial derivatives. - Creating and Managing a Complete Portfolio
Practical application of prior knowledge to build and manage a diversified portfolio.
When you get into the world of investing, one of the first things you hear is that not all stocks are created equal. There are different types, each with its own characteristics, risks, and opportunities. Among the best known are value and growth stocks, but there are also many other categories, such as cyclicals, defensive stocks, dividend stocks, small-cap stocks, and more.
Understanding these differences helps you choose the ones that best fit your goals, whether you're looking to grow your money quickly, earn a steady income, or protect yourself in difficult times. In this article, we'll explore what value and growth stocks are, how they work, their pros and cons, and we'll also discuss other types of stocks you can find on the market. If you're just starting out or want to diversify your portfolio, this guide will be great for making more informed decisions.
What are value stocks?
Value stocks are like those bargains you find in a store: they're "cheap" compared to their true value. This doesn't mean the company is bad, but rather that its stock price on the stock market is below what it should be based on its numbers, such as earnings, assets, or cash flow. Investors looking for value stocks want to buy companies that the market isn't currently valuing well, hoping that over time their price will rise to the level it truly deserves.
To identify a value stock, investors look at things like the price-to-earnings ratio (P/E), which measures how much you pay for each peso the company earns. If the P/E is low compared to other companies in the same sector, it could be a sign that it's undervalued. They also look at the price-to-book ratio (P/B), which compares the stock price to the value of the company's assets. A classic example of a value stock might be a large, stable company like Coca-Cola or a bank like Santander, which has steady profits but isn't popular, so its price doesn't reflect its true strength.
The good thing about value stocks is that they're usually less risky than others because you're already buying something "cheap." If the market realizes their true value, you can make a nice profit when the price rises. Plus, many of these companies pay dividends, meaning they give you a small portion of their profits from time to time, which generates income while you wait. But there's a risk: sometimes a stock seems cheap because the company has real problems, such as high debt or a business that's no longer performing. That's why you need to do your research and not just rely on the low price.
What are growth stocks?
Growth stocks, on the other hand, are like the stars of the market: companies that are growing rapidly and that everyone wants to own. These companies tend to reinvest their profits to expand, rather than paying dividends, because their goal is to continue growing. Think of companies like Mercado Libre, Tesla, or Netflix: they are constantly innovating, opening new markets, or launching products, and this causes their revenues and stock market price to rise at an impressive rate.
To identify a growth stock, you look at things like its revenue or earnings growth year over year. If a company is increasing its sales by 201P3Q or 301P3Q each year, it's probably a growth stock. They also tend to have high P/E ratios, because investors are willing to pay more for the promise of future profits. For example, Mercado Libre might have a P/E of 50 or more, while a value company like Coca-Cola might have a P/E of 15.
The best thing about growth stocks is their potential: if the company continues to grow, your investment can multiply. Imagine having bought shares on Mercado Libre 10 years ago: they would be worth much more today. But they are also riskier. Since the price is already high, any bad news (a crisis, a bad decision by the company) can cause them to fall sharply. Furthermore, these companies tend to be more sensitive to interest rates: if they rise, investors prefer safer options, and growth stocks lose their appeal. So, they are ideal if you are willing to take risks and have a long time horizon.
Key differences between value and growth stocks
Although both are stocks, value and growth stocks have very different approaches. Value stocks seek undervalued companies with solid fundamentals, hoping the market will recognize them. Growth stocks, on the other hand, invest in companies that are growing rapidly, even if their price is already high, because they are expected to continue rising. One way to think about it is that value stocks are for patient investors looking for security and gradual gains, while growth stocks are for those willing to take the risk for explosive growth.
Another difference lies in the sectors they tend to be held in. Value stocks often come from traditional industries, such as banking, energy, or consumer staples (think YPF or Procter & Gamble). Growth stocks, on the other hand, tend to be in technology, innovative healthcare, or e-commerce (such as Amazon or BioNTech). They also behave differently depending on the economic situation: value stocks tend to withstand recessions better because they are already cheap and many pay dividends, while growth stocks shine during expansions, when there is optimism and people invest in the future.
Advantages and disadvantages of each type
Value stocks have several advantages. First, they're less volatile: since their price is already low, they don't tend to fall as much in a crisis. Second, many pay dividends, giving you steady income. Third, if the market revalues them, you can earn a good profit. But they have disadvantages: they sometimes take a long time to rise, and if you choose poorly, you could end up with a company that never recovers. They can also be boring for stock-seekers.
Growth stocks, on the other hand, offer enormous potential. If the company continues to grow, your money can double or more in just a few years. They're also exciting because they're often innovative companies that are changing the world. But the risk is high: if the company doesn't meet expectations, its price can plummet. Furthermore, they don't typically pay dividends, so you rely solely on price increases, and they're more sensitive to high interest rates, as we saw in 2022 when many tech stocks fell sharply.
Other types of actions you can find
Beyond value and growth stocks, there are many other categories worth knowing. Each has its role in a portfolio and can be useful depending on your goals and market timing. Let's look at the most important ones.
Cyclical stocks
Cyclical stocks are those that rise and fall with the economic cycle. When the economy grows (during an expansion), these companies earn a lot because people spend more. But in recessions, they suffer because consumption declines. Typical examples are automotive companies (such as Toyota or Ford), tourism companies (such as Despegar), or luxury goods companies (such as Louis Vuitton). If the economy is booming, these stocks can provide you with large profits, but if a crisis comes, be prepared to see them fall. They're ideal if you want to take advantage of periods of growth, but you have to pay attention to the timing.
Defensive actions
Defensive stocks are the opposite: they hold up well in bad times. They come from sectors that people always need, such as food, healthcare, or basic services. Think of companies like Arcor (food), Johnson & Johnson (healthcare), or Edenor (electricity). They don't grow as much as cyclical stocks during expansions, but in recessions, they maintain their value because we all continue to buy food and pay for electricity. They're perfect if you want stability and don't like surprises, although their profits tend to be more modest.
Dividend shares
Dividend stocks are those that pay out a portion of their earnings to shareholders regularly, usually every quarter. Many value stocks fall into this category, but not all. For example, companies like Coca-Cola, Banco Macro, or AT&T pay regular dividends, giving you passive income. These stocks are ideal if you're looking to generate income without selling your shares, such as to supplement your salary or save for the future. The risk is that if the company struggles, it may reduce or suspend dividends, and the stock price could fall.
Small-cap stocks
Small-cap stocks are small companies with a low market value, generally less than $2 billion. In Argentina, these could be local companies like a publicly traded SME, or in the United States, startups that are just starting out. These stocks have a lot of growth potential, because a small company can become a giant (think of how Mercado Libre started), but they are also very risky, because they have fewer resources to deal with problems. They are a good option if you want to diversify and are willing to take risks.
Mid-cap stocks
Mid-cap stocks are a middle ground, with a market value between $2 billion and $10 billion. These companies are typically in a growth phase, but already have a certain stability. Examples include companies like Garbarino (in its heyday) or, on the American market, companies like DocuSign. They offer a balance between risk and reward: they grow more than large companies, but are less volatile than small ones. They're ideal if you want something balanced.
Large-cap stocks
Large-cap stocks are those of giant companies, with a market value of more than $10 billion. Think of Apple, Microsoft, or YPF. These companies tend to be more stable because they have extensive resources and diversified markets, but their growth is slower because they are already enormous. Many pay dividends and are a solid foundation for any portfolio. They're perfect if you want security and don't mind more gradual gains.
Emerging market stocks
Emerging market stocks are companies from developing countries, such as Argentina, Brazil, or India. They can be of any size or sector, but what defines them is where they operate. For example, a company like Petrobras (Brazil) or BYMA (Argentina). These stocks have great potential because emerging countries tend to grow rapidly, but they also carry high risks, such as political instability, inflation, or exchange rate fluctuations. If you want to diversify globally, they are an option, but with caution.
Sector-specific actions
You can also classify stocks by their sector, beyond their style or size. For example, technology stocks (Apple, Google) tend to be growth stocks, but there are also value companies in this sector, such as IBM. Energy stocks (YPF, ExxonMobil) can be cyclical or value, depending on the company. Financial stocks (Banco Galicia, JPMorgan) tend to be sensitive to interest rates and the economic cycle. Knowing the sectors helps you diversify and choose based on market trends.
How to choose between different types of shares
With so many types of stocks, how do you decide which ones are right for you? It all depends on your goals, your risk tolerance, and market timing. If you want security and don't mind waiting, value or defensive stocks are a good foundation. If you're looking for steady income, dividend stocks provide that cash flow. If you're willing to take the risk for high growth, growth or small-cap stocks are for you. And if you want to take advantage of the economic cycle, cyclical and emerging market stocks can be attractive, but with caution.
A good approach is to diversify: don't put all your money in one type. For example, you could have a 40% in value stocks (for stability), a 30% in growth stocks (for potential), a 20% in dividend stocks (for income), and a 10% in small-cap or emerging markets (for controlled risk). That way, if one type of stock declines, the others can compensate. Also, look at the economic context: in a recession, defensive and value stocks are generally safer; in an expansion, cyclical and growth stocks shine.
A practical example to see it in action
Let's imagine Lucas, who has 1,000,000 pesos to invest. He wants to diversify, so he divides his portfolio: he puts 400,000 in value stocks like Banco Macro, which is undervalued and pays dividends; 300,000 in growth stocks like Mercado Libre, which is growing rapidly; 200,000 in defensive stocks like Ternium, to protect himself in a crisis; and 100,000 in a small-cap ETF (like IWM). In one year, Mercado Libre rises 30%TP3Q, but Banco Macro only 10%TP3Q. Ternium remains stable, and small-caps fall 5%TP3Q. Overall, Lucas wins, because diversification protects him from the ups and downs.
Conclusion: Find the balance that works for you
Value and growth stocks are two distinct forms of investing, each with its own advantages and risks. Value stocks offer stability and potential upside if the market revalues, while growth stocks offer enormous potential but with more volatility. Beyond these two, you have a host of options: cyclical stocks to take advantage of expansions, defensive stocks to protect against recessions, dividend stocks for steady income, small-cap stocks for risk, and many more.
The key is to know your investor profile and diversify so you don't rely on just one type. There's no perfect stock for everyone, but with a little strategy, you can build a portfolio that helps you achieve your financial goals.
Next course date
Questions for you to reflect on
Why should I use all categories of actions?
Should I expect the same from everyone?
In times of crisis, which stock should I sell and which should I buy?
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
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