In 2015, "Value Stocks" were said to outperform "Growth Stock" in Indian financial markets. With this reference, consider the following differences between value stocks and growth stocks:
- While growth stocks generally do not return dividends, value stocks return dividends.
- While value stocks are usually traded at discount, growth stocks are traded at premium.
Which of the above statements is/are correct?
Growth stocks are associated with high-quality; successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. But with declining GDP growth rate in India, earnings growth rates have also eroded. With declining GDP growth rate, earnings growth rates have also eroded. Furthermore, growth stocks have higher price-to-earnings ratios when compared to value stocks, but growth stocks generally do not return any dividend. Thus; all this led to decline of growth stock in Indian financial markets. On the other hand foreign investors prefer stocks that are currently undervalued and have a steady dividend paying record over those companies with a reputation of consistent earnings growth. Since value stocks are traded at undervalued rate and generally earn high dividends; these stocks performed well above growth stocks.
This question is a part of GKToday's Integrated IAS General Studies Module