Growth Shares Vs. Income Shares

There is a distinct difference between "growth shares" and "income shares", however finding the value of grown and income shares is easier said than done. Even in mature markets, the difference between the growth shares and the income shares is not clear. Let’s take a closer look at both the types and differentiate the two.

Growth Shares

Growth shares are those shares whose company earnings are estimated to grow at a faster rate than the market. These shares, therefore, have the chance to rise incredibly faster than the market. Growth stocks tend to have a high price-to-earnings (PE) ratio, indicating that they will be overvalued in the future. Such an outcome is due to the stock investors factoring in the high growth estimated of the company.

Investors in growth stocks anticipate that the fast growth in profits will make the shares more attractive in the future and so it will fetch a higher price. These stocks are of relatively newer companies in sunrise industries. These companies, in most cases, don’t pay dividends. Since they are in a rapid expansive phase, they reinvest the retained earnings to make the business grow.

Note − Growth Shares are tough to value although a majority of shares in the market are growth shares.

Income Shares

In a dual-purpose fund, a share is allowed to a portion of a company's ordinary income. Dual-purpose funds issue two types of shares: "income shares" and "capital shares", which are appreciated on the firm's investing activities.

A dual-purpose fund allows shareholders to choose to invest according to their profile and investment goals without having any difficulty in changing the investment vehicles. An income share has a lower risk than a capital share.

Income shareholders are generally paid a final payment that is equal to the price of the first issue of the share. So, if the income shares were first issued at INR 10 per share, the final payment would be INR 10 per share. However, this depends on sufficient monies being generated when closing the trust.

In case the monies are insufficient, income shares will pay a proportion of the original value. Sometimes, if there is sufficient net profit, income shares are entitled to a part of the capital growth achieved by the trust. Income shares are ranked after preference shares (if issued) during closing-up, but prior to capital shares.

Note − Income shares are primarily preferred by investors due to their quality to offer higher profits and hence more dividends.

Updated on: 17-Sep-2021


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