Table of contents
Introduction
If you are after a long-term trading plan and want to see your capital grow, growth investing might just be the real deal for you. Growth investing is a concept central to stock market investors. The idea is to purchase shares of upcoming companies that record accelerated earnings. There is an appreciation of share price surpassing the overall market and value-oriented investment strategies.
Read on to learn more about growth investing, the best growth investment funds and value vs growth investing.
What is growth investing?
Growth investing is the concept of investing in stocks of a company with the assumption that it will record a faster expansion than its rivals. Consequently, investors expect a consistent rise in book value, sales, earnings, and cash flow.
Shares of those companies are purchased that earn a higher revenue as compared to other companies in the same sector as opposed to value investing where shares are purchased by investors at prices considered lower than intrinsic value.
You can also invest in growth funds. The manager of growth investment funds buys stocks in growth companies to earn better returns.
The primary objective of growth investing is to increase the investor’s capital. These stocks mainly expand when the value of individual shares rises. The best techniques of growth investing include:
- Following the market cycle, these stocks perform better during low interest rates.
- Identify businesses that will be relevant in the future and hold patents.
- Stay updated and study the growth rate of the company closely.
Factors for Evaluating Growth Stocks
Growth investors might base their analysis on certain techniques and standards, however, these techniques must be studied vis-a-vis the performance of each company. Investing in human capital is one such parameter that is linked to the growth potential of companies.
Since there is no certain formula to analyse the risk involved, certain objective and subjective parameters have to be studied individually. Here are 4 factors considered by growth investors that may provide capital appreciation:
Investment in human capital
If you are wondering how does investment in human capital contribute to growth, remember that skilled and updated employees foster innovation and productivity. For instance, companies investing in renewable energy are pumping funds into the R&D department for the best possible sustainable practices.
Therefore, evaluating a company’s investment in human capital is key to assessing its performance.
Earnings growth
Historical earnings growth of a company and forward earnings growth of a company can help investors judge the growth of a company in the future. The minimum earnings per share (EPS) growth is contingent on the size of the company.
For instance, a company earning more than $400 million must record a growth of more than 7%. Therefore, keep a tab on earning announcements to know which ones have the potential to grow at an above-average rate.
Return on Equity
Return on Equity (ROE) is used to assess the profit a company generates with the shareholders’ investment. It can be calculated by dividing the net income by the shareholder’s equity.
A stable ROE shows that the management is effectively running the company and producing returns for shareholders’ investments.
Share Price Performance
The value of a growth stock generally doubles in five years. With the increase in the stock prices of a company, the hold also increases simultaneously. Consequently, the value of the fund’s assets rises.
This enables an investor to earn a profit when they redeem their fund shares. Remember that growth stocks can be found in any exchange and across multiple industrial sectors. However, they are typically concentrated in rapidly growing industries.
Value vs growth investing
Growth stocks and value stocks are two sides of the same coin. As a company matures, a growth stock can turn into a value stock. This value growth investing strategy can be achieved if investors focus continuously on market dynamics.
However, when it comes to value vs growth investing for seeking steady returns, here are some points of differences between the two concepts.
| Categories | Growth Investing | Value Investing |
| Meaning | Investing in companies with high potential for earnings growth. The purchase is often made at higher valuations for maximum capital appreciation. | Investing in undervalued stocks with solid fundamentals. The aim is to purchase shares at a discount for long-term capital appreciation. |
| Approach | Growth investors invest in established businesses. They select businesses where the scope of growth is high and are expected to earn profits faster. | Value investing entails purchasing equities whose intrinsic worth is higher than the market price, consequently suggesting a higher return. |
| Focus | The focus is to buy stocks of companies with promising growth potential. | The focus is to buy stocks of undervalued businesses. |
| Risk Factor | High-risk factor because the businesses are new. The stocks are highly volatile. | The risk factor ranges from low to medium. |
| Expenditure | More expensive than value investments. | Less expensive than growth investments. |
Conclusion
There is no fool-proof investment strategy that promises high and safe returns. While growth investing can be profitable if a company performs well and can ensure consistent returns, it comes with its disadvantages. Owing to volatility of the stock market, no investor can be 100% sure about his or her returns. Therefore, create a balanced portfolio and increase your spread to minimise losses. For more latest updates on the share market, visit StockGro.
FAQs
Constant training and upskilling of the human workforce drive productivity and innovation. This leads to overall economic development which ensures long-term growth.
In case a new company shows a consistent increase in profits, investing in growth stocks will ensure higher returns in a short period. These stocks perform well during economic expansions.
Income investing is an investment technique that offers regular income. Growth investing is an investment strategy aimed at enhancing the profits and value of a portfolio. However, both strategies have a high risk factor.
A growth stock refers to those shares that are expected to grow at an above-average rate whereas mutual funds are investment vehicles that can include growth stocks, bonds and other securities from multiple investors.
Reliance Ltd. TCS, Dr Reddy’s Lab, Tata Motors, and Adani Ent. are some of the popular growth stocks in India.