How do 'value' stocks differ from 'growth' stocks?

The distinction between 'value' stocks and 'growth' stocks primarily revolves around their investment characteristics and expectations. Value stocks are characterized by being undervalued by the market, which means their current price is lower than their intrinsic worth based on fundamentals such as earnings, dividends, and assets. This undervaluation often leads these stocks to provide dividends, as many established companies willingly return profits to shareholders.

In contrast, growth stocks are those that investors believe will grow at an above-average rate compared to their industry or the overall market. These companies typically reinvest their earnings into the business rather than paying dividends, as they focus on expanding operations and improving profitability.

Thus, the correct answer effectively encapsulates the essence of value stocks being undervalued and often dividend-paying, whereas growth stocks are anticipated to have higher growth rates and often do not distribute dividends to shareholders. This understanding is particularly important for investors looking to develop tailored strategies based on their risk tolerance, investment goals, and market conditions.