Growth Investing Strategy: The fundamental goal of any investor is to grow his empire by making right choices. Every investor has its style of investing. But, every investment poses some risk of losing, some less, some more. It is upon the spender how much risk tolerance and time he has! It also depends upon factors like age of the investor, number of dependents, the sensitivity of the amount, and the required return rate. Some investment strategies like Value Investing, Income Investing, Growth Investing, and Dividend Investment are quite admirable in the market.
Today, we’ll discuss one of them – Growth Investing. In this article, we would start with understanding what growth investing with a short example and types of it is. At last, there will also be a summary post!
Understanding Growth Investing – Stock Trading for Beginners Strategy
It is a long and short term investment strategy in which the investor looks for companies which have a high growth potential in them. The investors generally have to spot growth stocks for it. These are small market capitalization stocks which increase at a much higher phase than market aggregate rate. But, as the organizations are brand-new, they are somewhat riskier than others because they haven’t been tested with market fluctuations yet.
This style is trendy among investors because if the firm performs reasonably well in the long term then the returns are unmatchable. Also, this ‘stock trading for beginners strategy’ focuses on the investor’s wealth capital rather than earning profits. The reason behind this is quite simple – small or new organizations do not declare dividends or bonus. Instead, they invest all their earnings again in their businesses to grow them more.
Also, the investor invests because he sees good potential. In other words, the startups which are working on developing new technologies or services which might have high demand in the future. However, it is not always the case, there are firms, without any new potential offering, whose earning and growth is way better than their big counterparts. Investors also consider them as growth stocks.
In one line, growth investing is to spend on prosperous and expanding organizations whose revenue and thus, the online stock trading price will hopefully rise in the future. The investors can then sell the stock at a higher price.
This style of investing is also known as capital appreciation online stock trading strategy. You know why!!
More than its True Value
A thing worth noting here is that the growth stocks have been performing exceptionally well from the inception. It creates a good demand among traders and investors. So, these shares are generally at higher prices than their real intrinsic value. As contrary to Benjamin Graham’s Value Investing, these are usually over-valued and open at a premium price above than their share price. It creates a debate between the two styles on which is better! But don’t worry, here is the answer!
However, these overvalued shares are performing well and have sound potential. So, the investors assume that this overvalued price will become undervalued one day if these growth stocks keep working like this. And, eventually, it will prove to be a perfect deal for them!
It will also put you at high risk if you invest in growth companies. Why? First, you are paying more than its value and second, any wrong assumption, uncertain event, or calamity like COVID-’19 can create huge losses.
Some notable investors who benefited greatly through this style include, Philip Fisher, Peter Lynch, & Thomas Rowe Price Jr., the father of growth investing.
Thomas even founded an investment firm in 1937, which used the same style and has been giving a 15% annual return since the last 22 years. The company is now one of the most significant multinational investment banking organizations.
Amazon Inc. and Apple Inc. are one of the largest organizations in the world. Both of them are growth stocks even after being overvalued. The valuation is because of many reasons like strong performance, goodwill, name, etc. Moreover, despite all this, many analysts predict an annual 30% growth rate for Amazon Inc for the next three years. It is a big thing for such a large firm.
Even after having a high P/E ratio and online stock trading rate, the projected growth rate is reasonably good. It is opposed to the principles of value investing. Probably the reason is Amazon is trying to enter into new market places and industries and spending significantly on innovation & research & development.
To understand this, you need to know the different types of growth investments which usually attract investors.
Types of Growth Investments
Although there are no specified types of Growth Investing Strategy, we have tried our best to categorize them.
The net worth or market acquisition judges the vastness of any organization. A small-cap company usually has a market capitalization of between $250 Million to $1.5 Billion. However, there is no fixed criterion for judging a company as small. This range is mostly used and set by analysts.
Small companies are generally in their initial phase and growing better than their big competitors. These organizations have posted excellent financial results and expected to develop their stock market trading prices as per demand. No doubt they perform better in depressing times too, but the risk and volatility are also much more.
Firms which develop products or services which have not been in the market yet and can help people make their lives easier are hot investments. Also, any innovation in any existing product or service shall serve the same growth.
Technology and healthcare are the most ever-demanding sectors, and any change in these can be profiting for investors in a short time.
Penny stocks, currency trading, real estate companies, nations with extraordinary resources are some of the high growth investments. However, these poses even more risk than growth stocks. Right approach and decision can help you earn aggressively, but you can lose every bit of your investment too.
So, these were some categories of growth investments. The market is full of sharp investors who are keeping an eagle eye on every new growth stock, which comes. And it creates more demand, thus, increasing the stock market trading price further. Therefore, decide rationally about the rate you will pay.
Summing Up All
As discussed, the growth investing strategy is a brilliant investment and stock market trading strategy among users who want to maximize their net worth or capital. It includes investing in the growth expected of small companies at a reasonable price which would benefit both parties, i.e. you and company. If you are someone looking for steady income, then probably this technique is not for you. It is like buying a gold bar and expecting the price to grow and sell it.
However, the return percentage is so lucrative that anybody can fall for them. And why should we not? This online stock trading strategy has proved its worth and helped several people grow their wealth. Even Warren Buffet admires it.
However, always keep in mind the risk, environment, & other factors in mind which can eat your money.