The wholesome reason why investors bid their money in stocks is to get more in returns. This is only possible when the right strategy is used while bidding the money. But wait, there isn’t a hero strategy that works for all, and there are dozens and dozens of investing strategies made by stock market experts. One such strategy is “Growth Investing”, which is one of the favourites for investors who want to make a good profit.
Growth investing is the strategy where the prime focus is to increase the investor’s capital. In this strategy, the money is placed on stocks of small and new companies whose earnings are expected to grow at a certain level.
But to what threshold?
If you have asked that question to yourself, you are heading in the right direction. In the Growth Investing strategy, the stocks of the younger companies are bought whose earnings are expected to increase above-average rate compared to the industry or overall market.
When we speak of the word “investing,” the risk always comes with it. Since the Growth Investing strategy involves buying from young and small companies, the risk along with them is high. The statistical and thoughtful insight for the high risk is because these companies are untried as they are new.
On a positive note, if the companies outperform their business, there is a good chance of booking higher returns in the forthcoming or near future.
There are several ways one can invest, especially in the stock market. A certain percentage of stock marketers buys stocks and hold them for a long period while a few sells them in a shorter span. There are also day traders who buy and sell the stocks on the very same day. Apart from such investors, there are Growth investors.
The focus of Growth investors is to invest in small and young companies that are believed to outperform the industry in the coming years. It is a high-risk investment but involves huge profits in returns which lures the investors.
One of the worrisome subjects of Growth investing is proper research and performance. If the company fails, you are losing your money and blindly investing in any small company will only help you in luck.
Good research is to be conducted considering the vision of young companies; this is because you will be holding on to the investment for a longer period and wait until your profits are mature. The profits are in the form of capital appreciation, which is the goal of Growth investors.
Apart from this, Growth-stock companies also invest their profits back in the business to avoid paying a dividend to their shareholders.
If you are new to investing, you might be unaware of the P/E ratio; it is used by the investors to evaluate if the companies have enough assets to liquidate when the company is failing. A shorter P/E ratio signifies the company has more assets than liabilities and is preferred by the investors.
In Growth investing, the idea is to place the money on small and young companies. In such a scenario, it is natural to have a high P/E ratio as the company is either small or young and doesn’t have enough assets. This is a statistical way of conveying there is a high risk in Growth investing, and it is natural. The core of the entire Growth investing concept is that the company will expand, prosper, and the Growth earning or revenues will turn into higher stock prices. The young companies may not have assets or earnings in the present situation but are expected to grow and have in the future.
There are dozens of young and small growing companies, but which would be the best fit for growth investment? Do we have any formula to determine the potential of a growth stock? No, there isn’t any.
If you wish to evaluate the potential of a growth stock, you must look and interpret the company’s subjective and objective factors. Besides, one must also look into personal judgement and gut feeling; In growth stock, gut feeling also adds to value, whereas other investments should be more practical than emotion-based.
You can consider a few of the below factors,
Though the companies are small and young, historical Growth is one of the determinant factors. For small companies, a growth investor can look for the Growth of the company over the past few years. If there is no significant growth in the company, you might not want to invest.
It is important to consider the pretax profit margin when you are looking at a company for Growth investing. We consider profit over sales as the company may have a good number in sales, but their earnings or revenue numbers might not be that great or appealing. If the earnings are less despite the huge number of sales, the company is having a major problem with handling the revenues and controlling costs. It is considered the best if the company exceeds the average pretax profit margin when compared to the last five years.
One of the most important factors is how much money the company has generated in revenues with the money shareholders have invested. This number can be calculated by dividing the net income by the shareholder equity. The best practice is to compare this value with the data from the past five years; if the numbers are stable or greater, the company is performing well.
Every quarter or a year, a company releases a public statement of the company’s profit for a specific period. These numbers are great to analyze if the company is performing well and is accountable when it comes to profit. They help the investors to determine which companies are likely to grow above the average and current rates. These public statements are announced made on specific dates of the quarter or the year.
A strong stock performance can make a significant impact while choosing a growth investing company if the company’s stock is performing good and is doubling in the next 5 to 7 years with at least 10% growth. This could be a good sign of a company for Growth investing.
Growth investing is the strategy where the prime focus is to increase the investor’s capital. A growth investor invests in young or small companies that are expected to grow in the near future.
Growth investing is a strategy where investments are made in small and young companies. These companies are expected to grow in the near future, but such investments do involve high risk.
Value investing is an investment strategy where the value stocks are traded below the intrinsic or book value.
Value investors look for a stock that is trading below the intrinsic value while the growth investors bid on the future of the company.