Choosing which stocks to invest in can feel overwhelming, especially with the wide range of options available. Many investors find it helpful to have a system for deciding which stocks to buy, what price to pay, and when to sell. Markets go through cycles—bull markets when prices rise and bear markets when prices fall — which can lead investors to make emotional decisions. Having a set of clear, objective guidelines can help you stay disciplined and avoid impulsive choices.

Even if you prefer to leave stock selection to professionals, it’s still valuable to understand the basic ideas behind how they evaluate investments. When it comes to picking stocks, two main strategies dominate: value investing and growth investing. Value investors focus on finding stocks that seem undervalued based on the company’s true worth, while growth investors seek companies that are expanding quickly and have strong future potential, even if their current price seems high. Both approaches help investors make more informed decisions about what they’re buying and why.

Value investors look for stocks that are trading for less than they believe the company is worth. A stock might be undervalued because of business challenges, industry struggles, management problems, or simply because it has been overlooked. Value investors believe that over time, the market will recognize the company’s true value, and the stock price will rise. They pay close attention to financial metrics like the price-to-earnings (P/E) ratio, price-to-sales ratio, dividend yield, price-to-book ratio, and sales growth rate. Their goal is to find solid companies at bargain prices.

Some value investors take it a step further by adopting a contrarian strategy. Contrarians intentionally seek out stocks or industries that are currently unpopular with the market, believing that buying what others are avoiding can lead to the biggest gains. However, distinguishing between a stock that is undervalued and one that is struggling for good reason requires careful research into the company’s financial health, management, and business prospects.

On the other hand, growth investors focus on companies that are expanding rapidly. These investors are less concerned with how cheap a stock is and more interested in its potential for future earnings. Growth stocks are often found among newer companies and industries experiencing significant innovation or demand. Growth investors pay attention to trends like rising sales and earnings per share, even if the stock’s valuation metrics, like the P/E ratio, seem high. Some growth investors follow a strategy called Growth At a Reasonable Price (GARP), looking for a balance between strong growth and reasonable valuation.

Momentum investing is an extreme form of growth investing, where investors seek stocks with accelerating growth and rising prices. Momentum investors believe in buying stocks that are already trending upward and selling quickly if momentum fades. This approach requires constant monitoring and is best suited for active investors who can dedicate time to tracking their investments closely.

Understanding the difference between growth and value investing is important because their popularity tends to shift over time. In some market conditions, growth stocks outperform, while in others, value stocks lead. Some companies may start as growth stocks and later become value stocks as they mature. Many investors choose to diversify by holding both growth and value stocks, giving their portfolio the chance to perform well in a variety of market environments. Most importantly, investing based on solid research and clear criteria, rather than tips or emotions, can help you make better decisions and know when it’s time to sell.