What Is Growth Investing?

Disclaimer: The content below is for educational and informational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. Investing involves risks, including potential loss of capital. Past performance is not indicative of future results. Investors should consult a qualified financial advisor or conduct their own research before making investment decisions.

If you have some disposable income and want it to grow over time, you have probably heard about the stock market’s potential to achieve it. There are many ways to pick stocks for investment, but one of the most popular methods is called growth investing. This isn't about finding temporary good deals today, but about identifying tomorrow's winners. However, no investment strategy can guarantee positive returns, and capital is at risk.

In this blog, you will know what is growth investing, how to build wealth, some common mistakes and more.

What Is Growth Investing?

Growth investing is a strategy in which you buy shares in companies expected to grow their sales and profits faster than other businesses. These expectations are based on forecasts and assumptions, which may not materialise. When you use this plan, you aren't looking for a company that pays you a steady monthly check. You are looking for a company that reinvests every penny it makes to grow, hire more people, and build more products.

Think about a small local bakery that starts opening shops in every city across the country. As it sells more bread and expands to more locations, the value of the business increases. Growth investors want to find that bakery when it only has two or three outlets, not when it’s already on every corner. This example is for illustrative purposes only and does not represent any specific investment.

Most growth companies don't pay dividends. A dividend is a small cash payment a company gives to its owners. Growth companies usually think they can do more with that cash by spending it on the business rather than giving it back to you right now. You may generate returns when the stock price goes up, which may occur as the company becomes more successful. Stock prices can also fall, and investors may lose some or all of their invested capital.

Identifying Growth Stocks

So, how do you know if a stock is a growth stock? Usually, these companies have a few things in common.

First, they are often leaders in new or changing industries. Think about things like computer chips, electric cars, or new medical treatments. These are areas where things are changing fast, and there is a lot of room for a new company to take over. Sector examples are provided for general information only and do not constitute a recommendation or endorsement.

Second, they have high sales growth. Even if they aren't making a huge profit yet, they are selling more and more every year. Investors see this as a sign that people really want what the company sells. High growth rates may not be sustainable and do not guarantee future performance.

Third, they have a competitive advantage. This is just a fancy way of saying they have something that makes it hard for other companies to imitate them. It could be a brand name people love, a secret recipe, or a piece of technology that no one else has.

Growth vs. Value Investing: What’s the Difference?

You will often hear growth investing compared to value investing. It is easiest to think of them in these terms:

It is like buying a house in a neighborhood that is just starting to get popular. The house might be expensive today, but its value may increase over time if demand rises; however, property and investment values can also decline.

It is like finding a house that is a bit of a mess but is being sold for much less than it’s worth. You buy it because it’s a bargain, and you anticipate that the price may increase if the market recognises its perceived value, although this is not guaranteed.

Growth investors are often willing to paying a high price now if they think the future is bright. Value investors only want to buy when they think they are getting a discount. Both are recognised investment approaches, but growth investing is usually more exciting and more stressful. The suitability of any investment strategy depends on an investor’s individual objectives, financial situation, and risk tolerance.

The Good and the Bad

Why do people choose this style? The main reason is the chance to make higher returns. If you put money into a high-growth company early on, your initial investment may increase significantly over time; however, such outcomes are not typical and are not guaranteed.

But there is a catch. Growth stocks are like a roller coaster. Their prices go up and down much more than some other types of stocks like utility companies or big banks.

If a growth company has a bad month or a competitor introduces a better product, the stock price can drop 20% or 30% in a single week. This is why you need a stomach for investing. You have to be calm about seeing your investments’ worth go down sometimes without panicking. Market volatility can lead to substantial losses in a short period of time.

Simple Rules for Growth Investing

If you want to try this, you should follow a few basic growth investment strategies to help manage risk.

Don’t Put All Your Eggs in One Basket: This is the most important rule. Even the most promising companies can fail. Maybe they have a bad leader, or maybe the world changes in a way they didn't expect. If you put all your money into one stock and it fails, you could lose a significant portion or all of your investment. It is much better to own five or ten different growth stocks in different industries. Diversification does not eliminate risk but may reduce exposure to a single issuer or sector.

Look at the Management: Since growth companies are often young, the people running them matter more than you think. Do the leaders have a good track record? Do they own a lot of stock themselves? When a CEO owns a large share of the company, they are more likely to make decisions that benefit shareholders. Management quality is only one of many factors to consider when evaluating an investment.

Focus on Long-Term Growth Investing: Growth doesn't happen overnight. It takes years to build a great business. If you buy a growth stock, you may wish to plan to keep it for at least five years. If you try to jump in and out to make a quick buck, you may increase the risk of losses, particularly due to market volatility and transaction costs.

Watch the Trends: Stock market growth investing is about the future. Keep an eye on how the world is changing. Are people shopping differently? Are they using new kinds of energy? Investing in companies that are part of these big changes may present growth opportunities, but trends can reverse or evolve unpredictably.

How to Get Started?

Starting is easier than most people think. You don't need a lot of money or a degree in finance.

1. Open a Brokerage Account: There are many apps today that let you buy stocks with low or zero commission structures, although other fees and charges may apply. Pick one that is easy to use and has a good reputation.
2. Do Your Homework: Don't just buy a stock because a friend told you to. Read about the company. Take a look at their website. Try their product or service if you can. Ensure that any investment decision aligns with your financial objectives and risk tolerance.
3. Start Small: You don't have to put all your savings in at once. You can start with $50 or $100. Many apps even let you buy a "fraction" of a share, so you can own a piece of a big company even if you don't have much money. The amount invested should reflect your personal financial circumstances.
4. Keep Adding Money: The best way to build wealth may be to add a little bit of money to your investments every month, regardless of whether the market is up or down. Regular investing does not assure a profit and does not protect against losses in declining markets.

Common Mistakes to Watch Out For

The biggest mistake people make is chasing the hype. When a stock is all over the news, and everyone is talking about it, the price is usually already very high. Buying at the peak may increase the risk of losses.

Another mistake is getting scared too easily. When the stock market has a bad day, many people get scared and sell all their stocks. But if you are a growth investor, a bad day is often just a small bump in the road. If the company is still good, some investors may choose to maintain their position; however, decisions should be based on individual circumstances and careful evaluation.

Lastly, don't forget to check in. While you should think for the long term, you shouldn't just ignore your stocks. Every few months, check whether the company is still growing. If they stop growing or their sales start to decline, it may prompt you to reassess your investment, taking into account your objectives and risk profile.

Conclusion

Growth investing is one approach that investors may use in an attempt to grow capital over time. It requires you to look at the world with a bit of imagination and a lot of patience. It isn't about getting rich tomorrow; it’s about picking the companies that may become the leaders of the future and sticking with them as they grow.

If you can stay calm when prices drop and keep your eyes on the long-term goal, growth investing may form part of a long-term investment plan. Just remember to do your research, spread your money around, and be patient. Real growth takes time.

Disclaimer: This content is for educational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. All investments involve risk, including potential loss of capital. Investors should consult professional financial advisors and consider their personal circumstances before making any investment decision.