Growth investing

Growth investing

Growth investing is the concept that you should buy stock in companies whose potential for growth in sales and earnings is great. Growth investors favor to focus more on the company’s value as an ongoing matter. Most of them plan to hold the stocks for long periods of time. Although, this is not always the position. At some point, “growth” as a label is as dysfunctional as “value,” given that very few people want to buy companies that are not growing.

The concept of growth investing took place in the 1940s and 1950s with the work of T. Rowe Price. He founded the mutual fund company of the same name, and Phil Fisher. Fisher wrote one of the most significant investment books ever written, Common Stocks and Uncommon Profits.

Investors can take advantage of new growth investing strategies in order to more precisely hone in on stocks or other investments offering above-average profit potential. When it comes to investing in the stock market, there are always a variety of approaches that can be taken. The goal, however, is generally always the same, regardless of the approach – grow your investments and increase your profits.

Growth investors are continually on the hunt for individual stocks or stock-related investments. The point is that such stocks are ready to grow and offer the potential for higher profit. The investments you make should, of course, always fall in line with your personal short-term and long-term financial goals, risk tolerance, and a number of other factors. 

Still, there are basic techniques, principles, and strategies that growth investors can follow that suit virtually any individual investing plan.

In this lesson, we want to explain growth investing as a strategy itself, and then break down more specific approaches and strategies that growth investors can employ.

In the investment world, growth investing is usually looked at as offensive rather than defensive investing. This clearly means that growth investing is a more active endeavor to build up your portfolio and generate more return on the capital that you invest. 

Defensive investing, in the opposite, leads more toward investments that generate passive income. Hence, this method works to protect the capital you’ve already earned. The bonds or blue-chip stocks that offer steady dividends are good examples.

There are several rules when it comes to growth investing.

1. Invest in fast-growing companies

You’ll usually find them where revolutionary new technologies and services are being created. You should favor less-known stocks. They have yet to reach the point of the peak. Generally, these will be smaller stocks, where growth potential is greater.

2. Buy stocks with strong relative performance 

You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, and that the companies are winning. You have to know that the best growth investing tips come from the performance of the stocks themselves. 

3. Use market timing to guide your growth investing

Be wary when the broad market is against you and drive when it’s with you. Don’t underestimate the power of the market to move stocks, both up and down. When the trend is up, the stocks will be going up. Buy your preferred stocks and hold on as long as they are profitable.

4. Diversify your portfolio

For anyone portfolio, ten stocks provide the capacity of diversification. Modest investors can do well with five stocks. But as you know,  never put all your eggs in one basket.

5. Cut losses short

This is the key to guaranteeing that you maintain enough capital to stay in the game. You have to select stocks that go against you as soon as you buy them. Get quit of these stocks fast. Never let the loss of your money invested exceed 20%, based on the closing price of the stock. This is the most important rule. 

6. Sell a winning stock when it loses its positive momentum

It is a clear indication that other investors are selling too. Never wait for the company to tell you the bad news. Sell first and read the bad news later. You can regularly tolerate relative performance line corrections for eight weeks.  When the limits are exceeded, sell the stock immediately.

7. Investing in hot sectors

One approach growth investors can take is to invest in stocks, mutual funds, and ETFs based on specific sectors and industries. However, it’s usually very easy to identify sectors that are “hot” in the sense of producing above-average returns for publicly traded companies.

For example, two sectors that have been particularly hot for a couple of decades or more are healthcare and technology. Companies that deal with technology, technological advances, or are constantly putting out new hardware, software, and devices are good picks for growth investors. The same is true for companies in the healthcare sector. It is logically. Everyone must care for their health. 

Hence, there are companies that are constantly developing new medications, therapies, treatments. In fact, these two sectors are related, as many recent technology developments have actually been advances in healthcare technology.

8. Understanding earnings

For growth investors in stocks, understanding a company’s net earnings is essential. This means studying their historical earnings as well since this permits an investor to evaluate current earnings relative to a company’s past review. Also, analyzing a company’s earnings history provides knowledge about the possibility of the company generating higher future earnings.

But be careful, a high earnings performance in a given quarter or year may represent a one-time anomaly in a company’s performance. You have to check a continuing trend or a certain point in an earnings cycle that the company continues to repeat over time.

Remember that earnings are what’s left over after subtracting all production, marketing, operating, labor, and tax costs from a company’s gross revenue. Sometimes, smaller companies try to make progress by pushing more capital toward growing their business. That may have a negative impact on their earnings in the short run, but in the long run, generate higher returns and greater profits for investors. 

Smart investors recognize some other factors to determine signs as to the company’s true growth potential.

9. Using the Price-to-Earnings Ratio

The price/earnings (P/E) ratio is a tool that growth investors often use to help them in choosing stocks to invest in.

The P/E ratio is particularly useful for growth investors who are trying to compare companies that operate in the same industry. 

Looking at a company’s P/E ratio is a useful analytical tool for growth investors.

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