Question

In: Finance

Explain the difference between growth stocks, value stocks, and income stocks. What investment objectives does each...

Explain the difference between growth stocks, value stocks, and income stocks. What investment objectives does each type of stock meet? What are the benefits and risks of investing outside of the United States? Name and discuss several ways to invest outside of the United States.

Solutions

Expert Solution

Answer(a): Difference between growth stocks, value stocks, and income stocks:

Growth stock Value stock Income stock
Definition These are the stocks of the companies that will potentially grow in the future and maintain a sustainable growth rate always. These are the undervalued stocks, companies whose intrinsic value per share is higher than their market value per share. Companies that are fundamentally and financially good and provide regular dividends.
Investment perspective Risk averse investors mostly purchase growth stocks. Investors who have long term perspective and can take less risk, prefer value stocks. Investors who seek fixed income on regular basis, choose income stocks.
Risk & Return They are highly risky stocks but give potentially higher returns. They have low risk and provides capital appreciation in longer run. These have moderate risk and provide regular income in the form of dividend.

Answer(b): Benefits and risks of investing outside of the United States

Benefits- Asset allocation, risk diversification, taking advantage of foreign markets, good exposure and growth.

Risk- Exchange rate risk, economy slowdown risk, interest rate risk, political risk, high transaction cost etc.

Ways to invest outside USA-

  1. One can invest into financial markets of other country. Financial markets include stock market, commodity market and currency market.
  2. People can invest into mutual funds of foreign country.
  3. You can invest internationally through American depository receipts (ADR)

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