Deciding what type of route you should take with your investments can feel like hard work. Understanding whether you should buy growth or income shares is a good place to start.
Let’s take a look at both these types of investments and weigh up the pros and cons of each. This way you’ll have a better idea about which one might suit you best.
What’s the difference between growth and income shares?
The difference between these investments is quite simple. Let’s take a look at how to tell them apart.
Growth shares are companies that increase how much money they make at a fast rate. This could be faster than competitors or the whole market.
Growing quickly can have a positive effect on the share price. So investors who hold these stocks are rewarded as the value of their investments rise as the business gets bigger.
Income shares, on the other hand, tend to be companies that have different priorities. Instead of trying to grow and take over markets, these stocks focus on steady financial performance.
With these shares, investors are usually rewarded with a payout called a dividend. These dividends can then be used by investors as a source of income.
What are the pros and cons of growth shares?
The benefits of buying growth shares:
- Potential for big gains that outperform the market
- Ability to build wealth at a fast rate
- Just a few growth shares can really boost your portfolio performance
The disadvantages of growth shares:
- High volatility where the price can rise or fall significantly
- Often expensive relative to their earnings
- Large gains in a small time period can result in a higher tax bill
- Potential rewards are high but so is the risk
What are the pros and cons of income shares?
Investing in income shares has some useful positives:
- Payments can be quite steady and reliable, particularly if you invest in something like a dividend aristocrat
- Less volatility means you can plan your finances better
- Reinvesting your income payments can be a great way to build wealth using compound interest
There are also some negatives to consider:
- Dividend payouts and the amount companies pay are not guaranteed
- Share prices can suffer because of the money paid out to investors
- Income in the form of dividends can affect your tax position
Is it better to buy shares for income or growth?
This will depend entirely on your investing strategy and what your goals are. Are you trying to build wealth or preserve the money you already have?
Growth shares can be most useful when you’re trying to accumulate wealth. Whereas income shares can be better suited if you are trying to protect your wealth or plan on living off your investments.
Another thing you should consider is your timeframe. If you have lots of investing years ahead, then you may be able to take on more risk. But if you’re closer to using your investments as a source of income, the safer option might be preferable.
How can I buy income or growth shares?
Whichever route you opt for, you can use a share dealing account to pick out the best stocks and funds that offer growth or income.
It’s also worth considering using a stocks and shares ISA because this account can help shield your investments from tax. This could really benefit you down either path.
Remember that all investing carries risk and there is no guarantee you’ll get out more than you put into either growth or income shares. Be sure to fully research your options to give your plan the best chance of success.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.