What is Growth Investing?
Growth investing refers to the process of investing in companies, sectors, and industries that are on the path of success and growth, and are expected to grow exponentially in the coming years. Most of the time such growth companies have a unique selling proposition attached to them; their competitors lack some characteristics, which gives them an edge in the industry.
Such characteristics can be simple outcomes like more sales, best among the lot growth rates, or increasing earnings. The company can also exhibit more of their qualitative features like a powerful brand and customer loyalty, maintaining a competitive advantage in the market.
Characteristics of Growth Investing
- Growth investing involves the stocks that hold budding and promising positions in the industries, that account for expansion in coming years.
- This type of investing is termed as “offensive investing”. This reflects that growth investing is initiated to capture high returns on the money invested and create a diversified portfolio in the process.
- Most of the time, growth stocks are priced at a higher or premium price than other stocks in its category. This reflects the desire and optimism growth investors have for such stocks.
- The approach of growth investing is on the extreme opposite of value investing. Growth investing focuses on stocks that have a declining value or have been detached from the primary stock listings. Such value stocks have low risks and modest returns.
Steps for Successful Growth Investing
Preparing the finances
One rule to always remember is that a growth investor should not invest the money in growth stocks that she or he would need in the next five years. Therefore, it is imperative to plan your investments and finances accordingly.
Growth investing is centred around investments that have the potential of a high return in the long term. The stocks might see frequent periods of the drop of up to 20 per cent. The investor should not be forced to sell their stocks during these reduction periods. Therefore, it is viable to set aside the growth investing money that you would not need for at least five to six years.
The biggest forte for a growth investor is a stern and up to date balance sheet to analyse the investments and protect them in bearish situations.
Getting Cosy with Growth Tactics
Now that you have prepared your finances precisely, it is now time for thorough research to take place. Take into consideration the companies or institutions that have shown tremendous positive returns year to year. For this, you can use quantitative methodologies that include stock screeners (for evaluating the prices of companies’ stocks), return on capital, total annual growth, interest rates, and more.
You can choose the other way for the measurement of a company’s growth too. Instead of evaluating the stocks, many growth investors focus on the market shares of big businesses.
The traders are also recommended purchasing growth stocks of those companies whose industries and sectors you are familiar with. It is useful if you know about the functioning of the companies and what they do, and is best if you are also interested in their functioning or products and services they provide.
Also, keep in mind to have a consentient strategy whilst choosing companies you want to invest in. Do not try to “chase returns” and jump from one approach to another.
Selecting the Stocks
Now is the time to start investing. First, you have to decide how much capital you are ready to invest in your growth investing strategy. If you are new to the market and this investing scenario, you should start with not more than 10 percent of your total capital investment. When you get accustomed to growth investing, and the market volatility it accounts for, you can keep increasing your portfolio towards such stocks.
Here another major factor is the amount of risk you are ready to take. Growth stocks tend to be more hostile than other stocks. That is the reason for employing such stocks in the long term, instead of trading on short term positions.
One way to test if you have invested much in growth stocks is to look at your portfolio and analyse how it makes you feel. Yes, this way emotions can be useful in trading. Looking at the portfolio and allocation towards growth investing makes you overwhelmed and a bit anxious? Then probably you should reconsider.
Maximising the Profits
Growth investing can turn out to be pretty volatile. Even though you tend to hold your growth stocks for many years, it is good to check the market regularly and changes happening. There are several legitimate reasons for you to do so.
Firstly, if your stock has gained really good value, then you might consider selling it for another stock that you see more potential in. Second, you might want to balance your portfolio yet again if the growth stocks you have invested in have gained massive exposure.
And third, the reason due to which you invested in a particular company might go missing. In such a situation, you should withdraw money as you do not see a potential anymore. This might include declining profit rates issues in the company, like poor management.
The best way to diversify your portfolio whilst growth investing is to go with growth funds. Growth funds have capital increment as the core aim and may or may not payout some little dividends.
These are one of the major types of mutual funds. Growth funds are usually categorised in terms of market capitalisation; small-cap, mid-cap, and large-cap.
Large-cap growth funds have the largest share in the market and are very popular among traders and investors.
“Foreign growth funds” are also becoming very common among growth investors and traders. It allows traders to invest in growth stocks internationally, therefore, expanding the horizon for traders. They tend to have very powerful earnings and revenue growth.
Factors to consider while Researching Potential Growth Stocks
There are various essential factors that one must keep in thoughts while picking up any growth stock. The growth rate risks involved, interest rates are some major elements of research.
Most of the stock investors pay diligent attention to the following factors while choosing the growth stocks:
- EPS- Earnings per share: Increasing earning per share can be a viable indicator of any healthy growth stock. Though there can be various types of earnings per share and it might not tell you the whole tale of any business, but a company whose EPS is on a constant rise overtime periods must be doing some good deeds. Investors start by listing the companies with fair EPS and then go about other factors to filter out the best investments.
- ROE- Return on Equity: Return on equity involves mathematical calculations to infer how effectively and efficiently a company or business can make returns and profits. It is taken out in percentage terms signifying a company’s net income.
- Projected Earnings: Many active and short term traders focus on the pronouncements of projected earnings as they have both prompts and long-lasting effects on the prices of growth stocks.
Advantages of Growth Investing
For companies, growth stocks act as an inducement for investing back in themselves and therefore inducing growth. And simultaneously, providing a boost to shareholders by increasing the value of shares in the market.
There might be very less on no dividend payouts. But the cash-out value is very substantial. Let us look at some significant advantages of growth investing:
- Growing and Successful Companies: The companies chosen by investors for growth investing are exhibiting high success with hopes of continuation.
- Best for Portfolio Diversification: One can easily diversify the portfolio with a mix of growth stocks through mutual funds, ETFs or indexes. This way, one can also mitigate risks and decrease volatility.
- High Returns: Growth investing tends to offer very high and powerful returns if you tend to hold to your stocks for several years. Other stocks in the underlying industry may not show as high returns as growth stocks.
- Tax Policies: Growth stocks tend to be more efficient in terms of taxation than value stocks. When the earnings are more than a lakh annually, then the tax rate is around 10 per cent on the capital gained.
- Trade against Inflation: The returns offered in growth investing are larger than inflation rates in any economy. This allows investors to surpass inflation and make up real income on the total investment. In the long run, the purchasing power and standard of living of the growth investors increase.
Disadvantages of Growth Investing
- High Volatility: The stocks in growth investing tend to be more volatile than other stocks. The companies that tend to show high success and growth can also lose a potential amount of growth very quickly. As a growth investor, you must have high-risk tolerance and understand that your investment’s value might reduce abruptly.
- Tiresome Research: Another difficulty associated with growth investing is the cumbersome research that the investor has to do to find viable growth stocks. One has to look at a wide range of aspects before investing huge sums of money in growth stocks. It is not easy to identify companies with substantial success and growth. One has to do extensive research and have a fair understanding of the market.
- Returns in the long term: The third disadvantage associated with growth investing is that it is a long term strategy. If you are an investor who wants quick gains, then growth investing isn’t the right stop for you. To be a growth investor, one must have patience and should be able to forget about any returns for many years of the investment.
It is mostly literal that when new, emerging companies are already successful companies continue to grow and reap fair returns; growth stocks will also thrive. In growth investing, investors tend to choose industries and companies that they trust and believe in. And they must not unbalance their belief when the stocks go anyway due to fluctuations in the market.
They must hold on, tight. Growth investors may try out different strategies and methods to invest in stocks depending on their financial goals and plans.
If you are eyeing for a regulated broker to facilitate growth investing or any other investment strategy, we recommend ROinvesting.
ROinvesting is a regulated broker functioning in Norway, Italy, Spain, Denmark, and Sweden. The brokerage firm deals in a wide range of instruments like indices, stocks, ETFs, forex, commodities and stocks, and more.
When companies and businesses invest the profits back into their operations, they succeed and thrive. This means that the investors associated with those companies also succeed. There might be risks associated with growth investing, and it requires significant research on the investor’s part to choose the righteous growth investing company.
If you are inquiring for an online broker to facilitate growth investing or any other investment strategy, we would recommend ROinvesting. The website is a regulated broker functioning in Italy, Norway, Denmark, Sweden, Spain. The trading site deals in a wide range of instruments like stocks, indices, fire, ETFs, commodities, metals, and more