Investors multiply or increase their assets or values through several investments or asset classes, one of which is growth investing. Growth investing is a popular investment style that deals with increasing the value of an investor’s financial assets.
There are several investment types such as stocks, bonds, mutual funds, and ETFs. As an asset class, growth investing has to do with investments that can help to increase an investor’s capital.
How Do Growth Investments Work?
It is important to learn about the investments you want to venture into before committing your money to them. Informed decisions will help you measure out your risks and predict your proposed benefits.
Growth investing deals with investing in growth stocks. It’s one of the many investment ideologies that include fundamental investing, socially responsible investing, contrarian investing, and even value investing.
Investors who want to venture into growth investing search for young and growing companies or markets that offer growth stock investments. Companies that offer growth stocks have some form of technology that predicts that the market will appreciate in the near future.
They are often companies with great potential or those that have just started public trades. The rationale behind investing in growth stocks, is the potential value it could have in the future.
Growth investors are enthusiastic about these types of investments because it tends to improve their capital gains. They invest in young companies, hopeful that as these companies or the entire market grows, so will their stock prices.
Even though investors have dividends in the companies, much of their profit comes when the company grows and their stock price increases. Growth stock companies, on the other hand, focus on their staying ahead in the market and on expansion.
Hence, they are most prone to reinvest profits into the businesses to secure long-term growth. In fact, investors prefer that profits are reinvested into the company rather than paid as dividends.
The downside to growth investing is that they often have a high price per booking or price per earning.
Are Growth Stocks a Good Buy?
They definitely could be. Growth stocks are a good buy, as long as the investor knows that risks are involved. For growth investments, you aren’t sure what the eventual turnout will be for the company involved.
You only make assumptions and estimate that a company can have a good growth rate with time. But, if you play your cards right as an investor, then you’re bound to make a lot of profits with a growth stock.
Types of Growth Stocks
There are several types of growth stocks. Some of which we will discuss below:
Small-cap stock describes companies with small market capitalization. The size of a company determines its net worth or market capitalization.
It is the market value for its outstanding shares. Even though the definition of a small-cap stock varies, it generally means a company with a net worth of between $300 million to $2 billion.
Companies in this category are often in their early stages and can have a substantial price increase. They also have a historical track record of high returns compared to other types of growth stocks.
But, they are also volatile with lots of risks.
Technology stocks, as its name implies, refer to any stock in the technology sector. This includes companies that provide software, hardware, semiconductors, and similar technological products.
Technology stocks are typically leading indicators for the stock market and economy at large. So, companies that make new technologies are often amazing investment choices for investors looking to own a home-run play in their portfolios.
These are stocks by medical facilities such as biotechnology, hospitals, pharmaceuticals, supplies, medical equipment, and the likes. A growth investor might see a medical facility such as a hospital and invest in it by purchasing healthcare facilities or stocks.
Eventually, as the facility becomes more established, it translates into profits for the investor. Also, just like technology stocks, companies that extend innovations in healthcare make excellent choices for investors who are also wanting to earn big from the health sector through stocks.
Additionally, stocks for these companies have tendencies to increase in price in such a short time.
Finding a Company’s Potential Growth
Finding a company’s potential growth can be easy if you do the right research. However, some viable ways have proved profitable so far to ascertain a company’s potential growth. Some of them are:
An investor can ascertain a company’s potential for growth through their track records. This is when an investor looks into the historical records of a business he’s about to invest in.
For growth investors, this can be effective because the past is not always a strong predictor of the future. However, historical earnings can be a benchmark or reference to what the trend has been.
The upside of looking at historical numbers is that they can help you make profitable investment decisions. While its downside is, chances are these numbers may not repeat themselves, so you’re taking a risk.
This involved the estimate of an organization’s income or earnings per share in a fiscal year. Earnings estimate is often reported and developed by an analyst working for an investment research firm.
With earnings estimates, an investor can know how much profits a company has made in the past year. Those figures can also give a good lead for future trends.
Profitability ratios are financial metrics that evaluate a company’s ability to generate income. This income is measured relative to the company’s operating cost, balance sheets, and revenue.
A profitability ratio can be more productive with a trend. It’s a lot easier to determine the amount of increase a company has made with a profitability trend.
An upward trend indicates that the profitability ratio of a company has increased over time, while a downward trend says otherwise. You can also track a company’s profitability through its return of equity or profit margins.
What Are Examples of Growth Stocks in 2021?
Growth investment have grown to be a profitable venture over the years. As such, there are several growth stock platforms an investor can take advantage of.
Here, we make a list of some of the best growth stocks that topped the market in the past year.
Tesla was founded in 2003 when very few people thought the concept of an electric car was possible. As hard as it was to sell, some were crazy enough to buy into the idea and possibility of driving electric cars.
Over the years, the idea began to look more feasible and worth trying out. Investors saw it as a worthy investment, and Tesla’s stock started to attract more buyers.
As such, there was an increase in the business.
As of 2020, Tesla not only builds electric vehicles they also produce infinitely scalable energy products. In essence, Tesla grew because it had a viable ideology, and people bought into it.
Etsy Inc. is a cloth production company that sells handmade and vintage items online. They sell various other items such as paper goods, candles, bags, music, and wood-work items.
Their services are run across the whole of the U.S. however they weren’t always as large as they presently are. They launched in 2005 and went public in 2015.
Although they had 10 years of obscurity and gradual growth, they have become a force to reckon with. This was only possible because they were a viable growth stock and investors saw the potential they had.
As of 2020, Etsy has grown to a net worth of about 1.7 billion dollars, which was more than 100% of their previous year’s worth.
PayPal Holdings Inc.
One thing that came with developments was the need to make transactions online. PayPal came to fill up that gap in business transactions.
Paypal is an American-based company that runs an online payment system in almost every country that accepts online money transfers. The growth in online businesses made money transfer across nations inevitable, and Paypal bridged that gap nicely.
This made investors identify it as a viable bud, and they channeled revenue towards it. As of 2020, PayPal had a revenue of $3.7 billion which was a lot higher than their previous year.
How To Become a Growth Investor
Growth investment is a profitable investment platform if you know the tricks of the trade. You can earn lots of profits with this style of investment.
Although several people are growth investors, there’s still room for more. It demands a keen sense of foresight and patience to become a growth investor.
To become a growth investor, you should be able to analyze the potentials of a company still in its infancy and be willing to stake a healthy sum for their potential growth. It is a lucrative but risky venture.
Before you venture into it, you need to know a few tips that will protect you from wrong choices.
Research Fast-Growing Companies
To become a successful growth investor, you’ll need to do your research well. Don’t just invest in any young company you see out there.
Carry out thorough research for companies to ascertain that they have the potential to grow and be established. Go through their historical records, estimated earnings, or profitability ratio and make an informed decision.
Observe Market Timing
This is such a vital step in growth investments. As a growth investor, you’ll need to learn to observe the market.
You wouldn’t want to put your money into a business only to discover that it didn’t make profits for you. You need to do your research before you delve into investing.
Learn to understand when it’s right and when it’s not to invest in a company.
Growth investments don’t work overnight. It’s not magic in any way.
As a growth investor, you’ll need to have patience. Growth investment is long-term.
Chances are, you may buy growth stock and wait for at least 5 years before it eventually matures. It’s not a short-term investment. It takes time to mature and grow.
Diversify Your Portfolio
It is not wise to engage in only one investment strategy. So it is with growth investments as well.
You can’t just buy one growth stock from a company and back off. It’s more profitable when you diversify your portfolio. That way, you make more profits in the long run.
Growth Investing vs Value Investing
Value investing is often regarded as a part of growth investing. They are both fundamental approaches involved in stock and mutual fund investment.
However, there’s a slight difference in their approaches and how they invest their funds. Growth investment has to do with investing in the stocks of a company that has the potential to grow in value.
In comparison, value investing is about investing in a stock that is undervalued. So, while a growth investor looks for potential growth, a value investor looks for buying a stock less than it is actually worth.
The similarity between the both is that they both predict that these stocks will appreciate over time. This must be the reason why Warren Buffet, the well-celebrated investor of the 21st century, agrees that there is no real difference between them.
Are You Ready to Become a Growth Investor?
You can commence your journey to becoming a growth investor today. With a little bit of keen-eyed scrutiny into prospects, some grit, and lots of patience, you can achieve your dreams as a growth investor.
To reduce your risks, understand trends better and decide what prospects could be profitable, consult a financial advisor. They’ll help you make accurate investment decisions and advise you on what investment platform is more profitable.