What is growth investing?
Growth investing is an investment strategy that is focused on the growth of the capital invested. Some of its concepts often oppose that of value investing. A growth investor typically invests in growth stocks or in companies. These are firms with above-average projected earnings compared to others of the same industry. Investors interested in these stocks focus on capital appreciation and future earnings potential. They firmly believe that growth stocks will eventually outperform the market over time.
Thomas Rowe Price, Jr. is considered as the “father of growth investing” after his company, T. Rowe Price, was able to prove the effectivity of the concepts of growth investing.
Growth stocks are often found on technology-related companies or other emerging markets. These kinds of firms are presumed to make a great impact in the market later on. Most growth companies are made up of smaller and younger companies. They usually have the capacity to show faster value progressions than older and bigger companies.
Growth companies are also oftentimes the ones that do not pay dividends to their shareholders. Rather, they focus on reinvesting their profits back to the company in order to develop and improve the business further.
As promising as it seems to invest in growth stocks, there is no formula that could guarantee that the said stocks will continue to grow in the direction it is predicted to go. Thus, this uncertainty presents a very high risk of making misjudgments and wrong decisions.
Key characteristics of growth funds
Higher priced than other common stocks – Unlike value investors who look for bargained but high quality investments, growth investors don’t mind having to pay higher priced stocks as long as their value is expected to grow even more over time.
Higher earnings growth record – Growth stocks are said to be immune from economic depressions. They are observed to continue to flourish and achieve high earnings regardless of the current economic conditions.
More volatile than the rest of the market – The downside of growth stocks is its high price which can suddenly plunge down due to negative news about the company or any major changes it can undergo, thus resulting in disappointing investments.
Factors to consider
Return on Equity (ROE) – It is the measure of the profitability of a business in relation to the investment of its shareholders. The efficiency of the business can be quantified by observing the ROE of the company. A general rule of growth stocks is the ability of the company to at least double its value within five years.
Earnings per Share (EPS) – It is the portion of the company’s profits that is allocated per outstanding share of a common stock. They should be able to present a significant annual growth rate of the EPS to be considered a growth company.
Projected Earnings – The projected earnings of a growth company is expected to reach 10-15% within 5-10 years. Although this may only be estimates, the company should have grounds plans to meet the said future value increase.
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