10th August 2020, Kathmandu
What is Growth Investing?
Growth investors concentrate on a company that has earned a high profit in the past, and they are expected to continue to do so. Growth investing focuses on those companies that give higher returns than other companies in the same market.
The Growth investors invest in companies that are growing and are expected to become more in the future, e.g., new companies or small companies that can improve and provide above-average profits in comparison to the average earnings of that industry. Under this strategy, investors buy stocks for less price and earn money when the company’s share price rises.
Growth stocks are vulnerable. They get easily influenced by market trends. Growth investing strategy is risky as there is no guarantee of success.
Some of the primary examples of successful growth investing strategies are Facebook, Apple, Amazon, etc. All of them started as small companies but had a competitive advantage. Their unique feature gained them a loyal customer base. Facebook, Apple, Amazon are leaders of technology now. The growth investing strategy is also used in real estate. E.g., purchase of a property due to its potential in growing the value.
Growth investment is more suitable for investors with a ‘risk-taker’ nature. It is not an easy task to identify a company with ‘growth-stocks.’ There needs to be a proper analysis of a company before investing. Some key points to notice are past and future earnings, the growth rate of shares, returns on equity, and profit margins. It is essential to measure profit margins because a company can have significant growth in sales but pitiful gains in earnings.
These are some key features of growth investing strategy:
Growth companies reinvest the profit back into the business rather than distributing dividends. The reinvestment allows the company to grow and expand more, which will lead to higher share prices in the future. The investors can then profit from capital gain, which is going to be much higher than the dividends.
Growth investing focuses on new and small companies that have the potential to go big. Companies in the fast-growing industry may have higher share prices as compared to their earnings. Since the profits get reinvested, investors do not receive dividends. In case the company is a failure, the investors have to bear the loss. Growth investing has a lot of risks.
Developing a strong portfolio is very important. Investing in growth stocks increases the chance of maximizing the value of a collection. The stock prices are expected to grow higher all the time. The returns are expected to be higher than the industry average. This strengthens the portfolio and its value.
As stated above, growth stocks have a higher growth rate than others. It is due to a feature they possess that no other company does, which gives them a competitive advantage. This factor makes them unique and helps the company to sell more. Furthermore, it helps them to have a more extensive customer base.