Growth vs value stocks: definitions, metrics and why interest rates matter

A growth stock is a share priced for fast future expansion: investors pay a high multiple of today’s earnings, sales or assets because they expect those numbers to grow quickly. A value stock is a share priced cheaply against what the business earns, owns or pays out today, usually because the market expects slow growth or doubts the company’s prospects. The difference matters to traders because the two groups react differently to interest rates, economic news and shifts in risk appetite.

This guide explains how the two styles are defined in practice, which numbers are used to tell them apart, why rate changes tend to hit growth shares harder, and what that means if you trade individual shares or indices through CFDs. If you are new to how shares are priced in the first place, start with how stock markets work.

What the labels actually mean

"Growth" and "value" are not legal categories or official ratings. They are descriptions of how the market is pricing a company, and the same business can move from one label to the other over time.

Growth stocks

A growth company is one whose revenue and earnings are expected to rise much faster than the economy as a whole. Typical features:

• High valuation multiples. The share price is a large multiple of current earnings, or the company may have little or no profit yet and is valued on sales.
• Low or no dividends. Cash is reinvested in expansion, research or acquisitions rather than paid out.
• Expectations do the heavy lifting. Most of what the buyer is paying for is earnings that do not exist yet.
• Concentration in certain sectors. Technology, parts of communication services, parts of consumer discretionary and parts of health care tend to dominate growth indices, although a fast-growing company can appear in any sector.

Value stocks

A value company is one the market prices modestly relative to its current fundamentals. Typical features:

• Low valuation multiples. The share trades at a low multiple of earnings, cash flow or book value.
• Higher dividends. Mature businesses often have fewer reinvestment opportunities and return more cash to shareholders, through dividends or share buybacks.
• Slower or more cyclical growth. Banks, insurers, energy producers, utilities, materials and many industrial firms often sit in value indices.
• Some form of doubt. A share is usually cheap for a reason: slow growth, a cyclical downturn, a regulatory threat, high debt or a business in decline.

Blend and the grey zone

Many large companies sit in between, and index providers often place a single company partly in the growth index and partly in the value index. The labels describe a spectrum, not two boxes.

How index providers sort shares into styles

The major index families publish growth and value versions of their headline indices, such as growth and value variants of the S&P 500 and the Russell and MSCI ranges. The exact methods differ, but they share an approach: each company is scored on a set of value measures and a set of growth measures, and its weight is split between the two style indices accordingly.

Common value measures:

• Earnings-to-price, the inverse of the price-to-earnings ratio.
• Book-to-price, the inverse of the price-to-book ratio.
• Sales-to-price, the inverse of the price-to-sales ratio.
• Sometimes dividend yield or cash-flow-to-price.

Common growth measures:

• Historical sales growth per share over several years.
• Historical earnings growth per share.
• Sometimes forecast earnings growth or price momentum.

Two consequences follow. First, a company’s style can change at each rebalance as its price and fundamentals change, which is one way index rebalancing creates flows. Second, a style index is a product of its rules. "Value" in one provider’s index may not hold the same shares as "value" in another’s.

The metrics traders use to tell them apart

You do not need an index provider’s full method to get a feel for where a company sits. A handful of ratios do most of the work, and our guide to the P/E ratio and valuation basics goes into each in more detail.

• Price-to-earnings (P/E). Share price divided by earnings per share. A high P/E says investors expect earnings to grow; a low one says they do not, or that they doubt the earnings.
• Price-to-book (P/B). Share price divided by net assets per share. Banks and insurers are often compared this way. Asset-light software firms often trade at many times book value because their main assets (code, brands, people) are not on the balance sheet at full value.
• Price-to-sales (P/S). Useful when a company has little or no profit, which is common among young growth firms.
• Dividend yield. Annual dividend divided by share price. Value indices typically yield more than growth indices.
• PEG ratio. P/E divided by the expected annual earnings growth rate in percent. It is a rough attempt to adjust a high P/E for fast growth.

Worked example: two companies, two styles

The numbers below are illustrative, not real companies.

Growth Co trades at 150 with earnings per share of 3.00. Its P/E is 150 ÷ 3 = 50. Analysts expect earnings to grow 25% a year.

Value Co trades at 40 with earnings per share of 5.00. Its P/E is 40 ÷ 5 = 8. Earnings are expected to grow about 2% a year.

On today’s earnings, Growth Co looks more than six times as expensive. Now project five years ahead, assuming the forecasts come true:

• Growth Co earnings: 3.00 × 1.25 to the power 5 ≈ 9.16. At today’s price of 150, that is a P/E of about 16.4 on year-five earnings.
• Value Co earnings: 5.00 × 1.02 to the power 5 ≈ 5.52. At today’s price of 40, a P/E of about 7.2 on year-five earnings.

The PEG ratios tell the same story differently: Growth Co 50 ÷ 25 = 2.0; Value Co 8 ÷ 2 = 4.0. On that crude measure, Growth Co is actually the cheaper share per unit of expected growth.

The catch is the word "if". Growth Co’s case depends on five years of 25% growth actually happening. If growth comes in at 10% a year instead, year-five earnings are only about 4.83 and the share still trades at roughly 31 times them. The market will usually re-price long before year five, which is why growth shares can fall sharply on a single disappointing set of results. Our guide to earnings season covers how those announcement days play out.

Why interest rates hit growth stocks harder

This is the part that matters most for anyone following both markets and macro news. The usual explanation is called duration, borrowed from bond maths.

A share’s value can be thought of as the present value of all the cash the business will generate for shareholders in the future. Each future cash flow is discounted back to today at a rate that reflects interest rates plus a premium for risk. The further away a cash flow is, the more heavily it is discounted, and the more sensitive its present value is to changes in the discount rate.

A value company returns much of its cash in the near term: steady earnings, dividends, buybacks. A growth company’s cash flows are weighted towards the distant future, when today’s investment is supposed to pay off. So a growth share behaves like a long-dated bond and a value share behaves more like a short-dated one. The bonds and yields guide explains why long-dated bonds move more for a given change in yield.

Worked example: the discounting effect

Illustrative numbers, using a single cash flow of 100 to keep it simple.

• A cash flow of 100 received in one year, discounted at 4%, is worth 100 ÷ 1.04 ≈ 96.15 today. At 5% it is worth 100 ÷ 1.05 ≈ 95.24. A one percentage point rise in the discount rate cuts its value by about 1%.
• A cash flow of 100 received in ten years, discounted at 4%, is worth 100 ÷ 1.04 to the power 10 ≈ 67.56 today. At 5% it is worth about 61.39. The same one-point rise cuts its value by about 9.1%.

Same rate change, roughly nine times the effect. A company whose value comes mostly from cash flows ten or more years out is exposed in the same way. That is why a rise in long-dated government bond yields, or a shift in expectations about central bank interest rates, often lands hardest on high-multiple technology and other growth shares.

What this looked like in practice

The pattern showed up clearly in 2022. As inflation surged and the US Federal Reserve and other central banks raised rates quickly, many high-valuation technology and growth shares fell far more than the broad market, while energy companies and other value-heavy sectors held up much better. The reverse happened in long stretches of the 2010s, when interest rates were very low and growth shares, led by large US technology companies, outperformed for years.

Two cautions. First, rates are only one input. Growth shares can rise while rates rise if earnings beat expectations strongly enough. Second, the link works through real (inflation-adjusted) yields and expectations, not the headline rate on any one day, so the day-to-day relationship is noisy.

Other forces that move the two styles

The economic cycle

Value indices are full of cyclical businesses: banks, energy, materials, industrials. These tend to do relatively well when the economy is accelerating and badly in a recession. Many growth companies sell products whose demand is less tied to the cycle, so they can hold up when overall growth slows, provided rates are not rising at the same time. Our guide to sector rotation covers how traders think about sectors through the cycle and why the textbook version is unreliable.

Bank profitability and the yield curve

Banks are a large part of most value indices. Their margins often benefit when the gap between short-term and long-term interest rates widens, and suffer when the curve is flat or inverted. So the shape of the yield curve can move value indices through the banking sector alone.

Commodity prices

Energy and mining shares sit mostly in value indices. A big move in oil or metals prices can move value indices sharply without saying much about "value investing" as an idea.

Risk appetite and concentration

In a strong bull market driven by enthusiasm for a theme, investors tend to pay up for growth. In a fearful market they often prefer current cash flows and dividends. The cap-weighted growth indices can also become very concentrated in a few giant companies, so "growth outperformed" sometimes really means "five companies outperformed". The S&P 500 trading guide discusses that concentration.

Traps on both sides

The value trap

A value trap is a share that looks cheap on every ratio and keeps getting cheaper, because the business really is in decline. Low P/E ratios are calculated on past earnings; if those earnings are about to shrink, the share was never cheap. Typical warning signs: falling revenue for several years, rising debt, a dividend paid out of borrowing rather than cash flow, and an industry being displaced by new technology.

The growth trap

The growth trap is paying a price that already assumes years of flawless execution. Even good companies disappoint sometimes. When a share trades at 50 or 100 times earnings, a small cut to forecast growth can take a large slice off the price, because the valuation was built on a long chain of expectations. Growth shares are therefore prone to large gaps on results days.

Mixing up the stock and the company

A great business can be a poor investment at the wrong price, and a mediocre business can be a reasonable one at a low enough price. Growth and value are statements about price relative to fundamentals, not about company quality.

What this means for share and index CFD traders

Most retail traders do not run style portfolios. But the growth and value distinction still affects day-to-day trading.

Volatility and position size

Growth shares are, on average, more volatile than mature value shares. If you size positions by a fixed amount of risk per trade, as described in the position sizing guide, the stop on a volatile growth share usually has to be wider, so the position has to be smaller.

Worked example: same risk, different sizes

Illustrative numbers. A trader with a 10,000 euro account risks 1% (100 euros) per trade and uses share CFDs on two shares quoted in euros.

• Growth share at 200, with a stop 8% away (16 euros per share). Position size = 100 ÷ 16 = 6.25, rounded down to 6 CFDs. Notional exposure 6 × 200 = 1,200 euros. At the 5:1 maximum retail leverage for shares under ESMA rules, margin is about 240 euros.
• Value share at 50, with a stop 4% away (2 euros per share). Position size = 100 ÷ 2 = 50 CFDs. Notional 50 × 50 = 2,500 euros. Margin about 500 euros.

Same risk, but the value position is more than twice the notional size. You can run the numbers for your own trades with the position size calculator. Remember that a stop does not cap the loss exactly: on a results-day gap the fill can be far worse than the stop level, as covered in gap risk and weekend risk.

Indices with a built-in style tilt

Some indices lean heavily one way. The Nasdaq 100 is dominated by large technology and growth names, which is why it often reacts more than other indices to moves in bond yields; see the Nasdaq 100 trading guide. The FTSE 100, with its heavy weighting to banks, energy, mining and consumer staples, has a strong value tilt. The Dow Jones and S&P 500 sit in between. Knowing the tilt helps explain why indices diverge on the same day.

Overnight financing

Share and index CFDs charge financing on the full notional value every night. A long-term "value" thesis that takes a year or more to play out can cost a lot in financing when held through a CFD. Our comparison of stock CFDs and real shares works through the break-even point. Most retail CFD accounts lose money, and holding leveraged positions for long periods adds cost without reducing risk.

Common mistakes

• Treating a low P/E as a bargain on its own. Check whether earnings are stable, rising or about to fall.
• Treating a high P/E as a reason to sell. High multiples can persist for years if growth delivers.
• Assuming the rate link is mechanical. Rising yields often weigh on growth shares, but earnings surprises and risk appetite can overwhelm it.
• Calling a style rotation from one week of data. Short bursts of value outperformance happen often and frequently reverse.
• Ignoring sector composition. A move in "value" may really be a move in oil prices or bank shares.
• Sizing growth and value positions the same way. Different volatility needs different position sizes for the same risk.

Frequently asked questions

Is a growth stock the same as a technology stock?

No, although there is a lot of overlap. Many of the largest growth companies are in technology, but a fast-growing retailer, drug maker or industrial company can also be a growth stock, and a mature technology company with slow growth and a large dividend can sit in a value index.

Why do growth stocks fall when interest rates rise?

More of a growth company’s value comes from cash flows far in the future, and distant cash flows lose more present value when the discount rate rises. In the worked example above, a one percentage point rise in the rate cut the value of a cash flow ten years out by about 9%, against about 1% for one a year out. The effect is a tendency, not a rule; earnings news can outweigh it.

Which has done better over time, growth or value?

It depends heavily on the period and the definition. Academic research going back decades found that cheap shares outperformed expensive ones over long histories, but growth shares outperformed for much of the 2010s and early 2020s. Leadership has changed many times, and past patterns do not tell you which style will lead next.

What is a PEG ratio?

The price-to-earnings ratio divided by the expected annual earnings growth rate in percent. A P/E of 30 with 15% expected growth gives a PEG of 2. It is a quick way to compare high-P/E companies with different growth rates, but it depends entirely on growth forecasts that are often wrong.

What is a value trap?

A share that looks cheap on valuation ratios because the market correctly expects its earnings to decline. It stays cheap, or gets cheaper, as those earnings fall. Checking the trend in revenue, margins and debt helps separate a genuinely undervalued share from a value trap.

Can I trade growth or value as a style?

Style ETFs track growth and value indices, and some are available as ETF CFDs, while share and index CFDs let you take positions in individual names or style-tilted indices. Our ETFs guide explains how those funds work. Any leveraged position carries the risk of losses larger than you expect, so read our risk warning first.