A Beginner’s Guide to Growth Investing

A Beginner’s Guide to Growth Investing

While everyone has preferences regarding finances, most agree that maximizing profit is any investing strategy’s first and foremost goal. Of course, investors will have different risk profiles and time horizons, affecting which strategies will work best to reach their goals. However, a few universal ideas and tools may be helpful for a wide range of growth plans and investors.

What Is Growth Investing?

• A more precise definition of growth investing is the goal of expanding one’s wealth via long- or short-term capital appreciation. However, you may increase your money by obtaining any return on your capital, such as interest payments from a certificate of deposit (CD) or bond. A diversified portfolio’s “offensive” part is devoted to growth investing, while the “defensive” part is used to generate income, minimize taxes, or protect the principal.
• By contrast, value investing occurs when experts believe that a company’s stock price is trading below where they believe it should be due to factors that are unlikely to alter shortly. Morningstar, an unbiased financial analysis firm, divides all stocks and mutual funds into three categories: growth, value, and blended (growth plus value).

Popular Types of Growth Investments

• Throughout time, a select few types of assets have consistently shown the highest development potential. However, equity is required for all of them, and the stakes are higher than usual for most of them.

These are some examples of growth investment types:

Small-Cap Stocks

• Market capitalization, often known as a company’s net worth, is used to quantify a business’s size. Although there is no agreed-upon definition of what constitutes a “small-cap” business as opposed to a “micro-cap,” “mid-cap,” or “large-cap” company, most analysts define small-cap companies as those having a market worth between $300 million and $2 billion.
• These businesses are often just starting, so their stock prices have much room to increase. There is a greater degree of risk and volatility with small-cap companies, but they have traditionally produced better returns than their blue-chip counterparts. Moreover, during the economic recovery, small-cap equities have typically surpassed their large-cap counterparts.

Technology and Healthcare Stocks

If you’re searching for a particular investment win, consider investing your money in a company specializing in technological innovation or medical advancement. Stocks of firms that create groundbreaking or widely adopted new items might see meteoric price increases.

In 1994, before the introduction of Viagra, the share price of Pfizer (PFE) was slightly around $5.

After receiving FDA clearance in 1998, this blockbuster medicine drove the company’s stock price to more than $30 per share during the next five years.

There are times when a growth stock may see dramatic fluctuations. For example, in the months after its initial public offering (IPO) in the autumn of 2017, streaming video startup Roku (ROKU) had a meteoric rise, only to have its share price plummet back to where it had been on its first day of trading.

Speculative Investments

High-risk growth instruments are attractive to thrill-seekers and speculators, who use them to make money off of market fluctuations in volatile markets. There are private equity funds and oil and gas drilling partnerships for risk-takers in the upper-middle and upper classes. The potential rewards for success in this field are substantial, but the risks are high.

Researching Growth Stocks

When gauging the success of an investment, it’s essential to keep several things in mind. First, the amount of money an investor earns is heavily influenced by the growth rate, risk level, and other factors.

Among the information that growth investors and analysts look at is the following while analyzing stocks:

Profitability of Shareholder Investments (ROE)

Return on equity (ROE) is a financial metric used to measure a company’s profitability. Net income (the amount left over after preferred stock dividends have been paid but before ordinary stock dividends have been paid) is expressed as a percentage of shareholders’ equity.

Suppose two corporations, A and B, have an annual net income of $75 million and $100 million in shareholder equity. In that case, the smaller firm is delivering a higher return on equity since it produces the same net income with less equity.

Growing Profits Per Share (EPS)

Earnings per share (EPS) growth over time indicates a healthy firm, even if there are several kinds of EPS, and the amount of money made per share only reveals some things about how a company is managed. Companies with rising earnings per share (EPS) are attractive to investors, but it is important to dig further to ensure the earnings are actual.

Profit Forecasts

Since predicted earnings announcements may have immediate and future implications on a company’s stock price, they are widely followed by day traders and short-term investors. In addition, numerous investors profit from trading earnings reports.

When a company’s forecasted profits come in higher than expected, the stock price frequently rises sharply before falling back in the days that follow. However, with optimistic profit forecasts coming in regularly, the stock price should grow.

The Bottom Line

Fundamental analysis, technical analysis, and market research are all intertwined with growth investment, adding another layer of complexity to an already dense topic. Listing all the growth tactics utilized by individual and institutional investors would be much beyond the scope of this essay. Instead, talk to your broker or financial adviser about potential investment growth options.