Summary: Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term “growth investing” contrasts with the strategy known as value investing.
If an investor is buying stocks from businesses that have a high growth potential, companies that will likely grow faster than the market average, then they are growth investing. Picking out publicly traded companies that expect to have higher than average earnings are growth stocks. Putting money into companies like that means that the investor is generally expecting to receive capital gains on their investment.
Capital Gains v. Dividends
One of the main reasons that growth investors are expecting value to be returned as capital gains is because the companies that are likely identified as growth stocks are newer and plan to reinvest any profits rather than disperse them as dividends. If an investor is seeking to have money returned as dividends then using a growth investing strategy is unlikely to be the plan they should use.
How to Pick Growth Stocks
While many other investment strategies are backed by formulas and mathematical evaluation tools, choosing growth stocks is based solely on market interpretations by the investor. Growth stocks are chosen based on a company’s position in their industry, historical performance by the company and the investor’s own knowledge-backed opinions. It’s important to know the industry with a broad depth since there are no formulas that can assist with determining the future value of stocks like these.
Where to Find Growth Stocks
The markings of most growth stocks are uncovered when their earning potential is apparent. Since the benefit of growth stocks comes from their capital appreciation, it’s wise to choose smaller companies with high growth potential, blue chip stocks, recovery shares and emerging markets to realize an investor’s goal. Those four areas are the best signs of where to start looking for a solid growth investment opportunity.
To understand a company’s potential there are a few pieces of information that can help.
- Forward earnings growth estimates from quarterly or annual earnings announcements
- Management of revenue and expenses
- Stock performance
- Historical earnings growth
- The company’s return on equity
If all of the above pieces of information can be uncovered, and they show a likelihood of improvement as the business moves forward, then investing in that company can reward any savvy investor. This is the basis for growth investment strategy, find a high potential for above average earnings, plan on earning a return on the investment in the form of capital gains, and start watching the portfolio grow.