Growth investing is an investment strategy that focuses on growing invested capital. Growth investors invest in companies, industries, and sectors that are in the early stages of growth, with tremendous growth potential. The investment strategy is offensive rather than defensive as it entails trying to build a dynamic portfolio and generate more returns on invested capital.
Looking for investment opportunities in rapidly expanding industries where new technologies and services are increasingly coming up lies at the core of growth investing. The idea is that the company you invest in will prosper and expand over time, leading to growth in earnings as well as shareholder value.
Key Growth Investment Factors
Historical Earnings Growth
When it comes to investing in an effort to grow capital, you should focus on companies with strong historical earnings growth. A company that displays good growth in the initial stages will be a strong bet for future success.
Solid Profit Margins
Solid profit margins are necessary if an investment is to deliver higher returns. A company able to control operational costs would always be an ideal pick, especially if its sales are increasing at an impressive rate. A company that surpasses its five-year average pretax profit margins, as well as those of the overall industry, will be a good bet for growing capital.
Types of Growth Investments
Small-cap stocks in hot sectors are some of the best bets for investors looking to grow their capital over time. A small-cap stock is one with a market cap of between $300 million and $2 billion. Companies in these segments backed with technologies or services that are poised to elicit strong demand in the future are some of the best to invest in.
The fact that these companies are still in their initial phase of growth makes them ideal for long-term investments, given the high chance of price appreciation. Historically, small-cap stocks in hot sectors have posted higher returns than well-established blue-chip stocks – but they come with a big risk as they are less established and less capitalised.
Technology and Healthcare Stocks
Companies with groundbreaking technology, as well as those with operations in the healthcare sector, can be excellent growth investments. Shares of companies developing revolutionary products tend to rise in valuation, translating to higher returns for investors.
Companies providing revolutionary healthcare products, especially those touching on unmet medical needs, are also ideal for investors looking for a home run in terms of growing capital.
High-risk growth investments such as penny stocks, futures, and options contracts can also provide an avenue for growing capital at an impressive rate. Such investments are ideal for experienced growth investors who can make the right choices given the high risks involved.
Growth investing vs. Value Investing
Growth investing differs a great deal from value investing. As growth investors strive to grow their wealth and capital through long-term or short-term strategies, value investors pay more attention to acquiring undervalued investments that have the potential to increase in value over time.
Growth investing places less emphasis on the present price of an investment, opting to focus more on potential. Value investing, on the other hand, pays more attention to the current intrinsic value of an investment with the assumption that its valuation will go up in the future.