As an investment strategy and an investment style, growth investing primarily focuses on growing your investment capital. So if you adhere to this strategy, you’d be buying shares in a company that anticipates a higher-than-average earnings growth rate based on its industry sector and the overall condition of the stock market. Growth investing can be defined by comparing it to value investing.
- Growth investors – put less emphasis on the current price of a stock and focus on a company’s future potential
- Value investors – choose stocks that are trading at less than today’s actual value
Growth investors assume that the actual value of a stock is going to increase and will eventually exceed its current value. Unlike value investors, they buy company stocks that are trading at a price higher than their actual value based on that assumption. So basically, they will attempt to grow their wealth through long-term or short-term capital appreciation. Consequently, growth investing is viewed as a capital growth strategy.
It’s not about dividends
Growth investment strategies are all about profiting from capital gains, not dividends. The typical growth investor will focus on younger companies that have an excellent potential for growth. The theory is that earnings or revenue growth into higher future stock prices. Basically, growth investors look to profit from capital gains, not dividends. This is why growth companies don’t pay dividends and reinvest their earnings instead.
Elements to look for
Investors Hangout understands the concept of growth investing as well as a number of other stock-picking strategies. For instance, a certain amount of interpretation and judgment is required when choosing these stocks (or any other stocks for that matter). Growth investors use certain criteria, guidelines, or methods as an analytical framework. However, these must be applied with a company’s circumstances in mind.
While it’s easy to find growth stocks just about anywhere, they will most likely be found in the faster growing industries. Investors must look at a company’s past performance in relation to its industry’s performance. Here are some guidelines to consider when you start to develop your growth investing strategy:
- Choose companies with a 5 to 10-year track history of strong earnings growth
- Companies that have shown strong profit margins over the past 5 years are excellent growth investment stock candidates
- Consider choosing companies with a stable or increasing return on equity (ROE) as this is a measure of profitability
- Pay close attention to a company’s quarterly public statements of profitability to find some that have the strongest forward earnings growth
The general rule of thumb in growth investing is that a 15% growth rate is required in order for a stock to double in price over a 5-year period. If the stocks you’re considering cannot do that, you might want to reconsider your options.
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