Stock market investing is not as complex as some Wall Street professionals will make you believe. The truth is that you can build a portfolio tailored to your particular retirement targets by using a consistent approach honoring several fundamental principles like prudence, long-term thinking, and diversification. And growth investing is among the most popular styles you will find out there. This insightful piece highlights growth investing principal concepts that you need to grasp. But first, let us understand the meaning of growth investing.
What is growth investing?
Growth investing is an investment strategy that primarily focuses on capital appreciation. The individuals who follow this style of investment strategy are growth investors who typically invest in growth stocks. In finance, growth stocks are stocks of a firm that generates sustainable and substantial positive cash flow and whose earnings and revenues are likely to increase at a higher rate than average companies in the same industry.
What are growth companies?
Generally, growth companies are firms with the capability of growing at a higher rate than the market average. Unlike more prominent and established companies, which typically offer dividends to their stockholders, growth companies often reinvest their revenues to facilitate further growth. Nowadays, investors seem to prefer these companies more since they manifest excellent growth potential that mostly roots from the firm providing advanced or exceptional products that are ahead of their competitors’ products.
What makes it growth investing?
Unlike value investing, growth investing is the style of a growth investor choosing a firm that is yet to attain its full potential of investing in. Here, the investor has to perform comprehensive and adequate research to identify companies that can develop rapidly and healthily compete with other larger organizations within the same field. In simpler terms, growth investors take higher risks hoping that the young or small companies will grow and make money, instead of investing in an already established firm.
Finding growth stocks
Typically, growth investors have to undergo three principal steps of identifying great growth stocks as discussed below;
Identifying trends and the companies behind them
A company that can capitalize on potent durable trends can multiply its profits and sales for many years. And this goes a long way in generating wealth for their stakeholders along the way. The ongoing pandemic accelerated multiple trends that were already well underway. For example, ecommerce is a current trend that has become more popular due to more people shopping online. And Latin America’s MercadoLibre holds a leading share of the digital retail market. Other trends include digital advertising and payments, cloud computing, and remote work.
Prioritizing firms with competitive advantages
Investing in growth companies showing robust competitive advantages is also essential. Competitive advantages become vital, especially during unstable times like the ongoing pandemic. A young or small company will survive and prosper through market downturns with a solid competitive advantage. Conversely, those without a competitive advantage are likely to struggle. Competitive advantages may include scale advantages, high switching costs, and network effects.
Spotting companies with huge addressable markets
Lastly, growth investors want to invest their hard-earned money in businesses that feature substantial addressable markets. You can utilize industry reports from various research firms like Gartner and eMarketer to help you with industry size estimates, market share figures, and projections for growth.
When the opportunity is enormous, the chances are high the business will ultimately become larger. Additionally, the earlier you invest in a company’s growth cycle, the longer it can keep growing at an exciting rate. And despite growth stocks’ premium price tags, the best ones can still deliver fortune-creating earnings to growth investors while fulfilling their remarkable growth potential.
YouTube: Growth vs. Value Investing (Richard Coffin)
Photo credit: The feature image has been done by Alla Serebrina.
Editorial notice: Risk is an essential part of investing, so please be careful with your funds and what you do with them. No matter where you put your money, make sure to read the fingerprint and make due diligence checks.