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The Motley Fool

ASK THE FOOL

Growth or Value?

Q: Should I invest in “growth stocks” or “value stocks” — which is better? — G.G., Portland, Oregon

A: You don’t have to choose one or the other — some of the best stocks to invest in are both.

Growth stocks are tied to companies that are increasing their revenue and earnings relatively rapidly, while value stocks are tied to companies with market values significantly below what they seem to really be worth. If you find a company that’s growing at a solid clip and it seems to be undervalued, that’s a very appealing proposition, offering a good chance of stock price appreciation.

It’s best, overall, though, to favor undervalued stocks. Even if they grow slowly, they offer a margin of safety by not being overpriced.

Q: Are secondary offerings and subsequent offerings the same thing? — K.F., Muskegon, Michigan

A: Subsequent offerings are often called secondary offerings, but the two events are different.

When a company “goes public,” it issues stock in itself via an initial public offering (IPO) on the open market. It’s common for insiders or large investors to keep sizable ownership stakes in the company, with only a portion of shares sold in the IPO. If these big investors later sell some of their shares to the public, that’s a secondary offering, and the investors collect the sales proceeds, not the company.

A subsequent (or follow-on) offering happens if the company wants or needs to raise more money later (perhaps to pay down debt, finance operations or buy another company). It will create and sell new shares, increasing the number of shares outstanding and diluting the value of existing shares. That’s not great for existing shareholders.

FOOL’S SCHOOL

Lower Your Risk

It can seem like investing in stocks is a crapshoot, as stocks can go up or down on any given day, but it doesn’t have to be so risky. Here are some ways to reduce your risk.

1. Invest for the long haul. Short-term investing is more like speculating or gambling. Being a shareholder means you’re a part-owner in a company, so commit yourself to those businesses and aim to stay invested in them as long as they remain healthy and growing. With a long investing period, you can ride out the occasional market downturns that will likely occur. Don’t worry about what happens this year if you don’t plan to sell for many years.

2. Learn more. The savvier you become about investing, the fewer mistakes you’ll likely make. Don’t buy stocks merely on tips from friends or strangers without even knowing what a company does. Instead, read widely and keep reading. Start with books by Peter Lynch, John Bogle, The Motley Fool — or the “Little Book” series of investing guides. Read Warren Buffett’s educational letters to shareholders at berkshirehathaway.com. Hang out at the Fool online (fool.com), reading and asking questions on our discussion boards.

3. Invest only in companies and industries you have studied and understand well. Weigh the risks that companies disclose in their financial statements. Consider a stock’s valuation. Assess the market capitalization, expected future earnings and price-to-sales and price-to-earnings ratios for candidates for your portfolio. Stocks that seem undervalued should offer less downside risk than exciting high-flying stocks.

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