What is a growth stock, and how is it different from a value stock?

A growth stock is a company whose revenue and earnings are increasing much faster than the average business, and whose price reflects that. Investors pay a high multiple of current profits because they expect those profits to be far larger in a few years. Technology companies dominate the category; Nvidia, Amazon and Tesla have all been growth stocks in their time. Most reinvest everything and pay no dividend.

A value stock is the opposite profile: a company trading cheaply relative to its earnings, cash flow or assets. Often it is in a mature industry, growing slowly, or temporarily out of favour. Banks, energy companies and industrials fill this bucket. Many pay dividends because they have more profit than they can usefully reinvest.

Both approaches have long stretches of winning. Growth trounced value for most of the 2010s; value led for long periods before that. Nobody has reliably predicted which will win next, which is the polite way of saying that owning both, as a broad index fund does, is the sensible default.

The practical risk with growth stocks is that the price depends on expectations coming true. When a fast-growing company merely grows at a normal pace, the stock can fall by half even though the business is fine. Value stocks have the opposite risk: cheap for a good reason, and staying cheap.