Certain financial markets including the stock market are not that hard for you to get your hands on should you want to get involved and make profitable investments. With appropriate approaches alongside applying some of the key investment principles – long-term plans, careful preparation, versatility – in their trading systems, any trader at any level will have the chance to reach their dreamed profitability.
Among all the popular styles to approach financial markets, growth investing surely makes its name somewhat outshine the rest. Usually viewed as the contrary to value investing strategies, growth investing still shares common points with the former, including targeting financial assets with a more significant rate of return than the average level. But how exactly does it differ from other ways of investing? Will applying it to your trading plans make a great impact on your results? Let’s take a deeper look!
What is Growth Investing?
Growth investing is a particular way to strategically approach a certain financial market and make investments that concentrate on capital appreciation. The most common targets to growth investors among all investment possibilities are companies and sectors with capabilities and clear signs of quick expansion.
Potential investments usually include high-earning companies with small caps and startups that own exclusive technologies, innovative products, and services allowing them to grow even quicker than other big names in the industry. However, as suggested in basic financial principles, these companies are also connected with high chances of risk to compensate against the high returns.
The Differences Between Growth Investing and Value Investing
In contrast to growth investing strategies where investors target positively anticipated stocks in highly volatile markets, traders in value investing aim for companies with older products and services that have already gone past their prime, growing slowly or just making no progress at all.
During the process, investors are looking for stocks with lower values than the average on the markets – regarded as ‘discounted prices’ – betting that the views on the companies owning those stocks will change and, in turn, make the stock prices rise again. This situation requires that those expected companies must stay in business and never stop to try to get back on their feet.
In general, the two styles involve investing and making bets that the value of a stock will increase in the future more than it does at the present. The time required for both ways can be unexpectedly long for the chosen stocks to reach the desired values and yield expected profits. However, with certain strategies, they are still safe approaches for any trader that is looking for something that is not too risky for long-term investments.
An Overview of the Growth Stock Market
During the process of evaluating these companies to see whether they are profitable or not, investors deeply analyze and compare their intrinsic values to the current market prices. These innate merits are defined as different aspects including the current business model, financial statements, market and competitor analysis, and operation management.
Despite the undeniable preferences for small companies, growth investing does not just revolve around only the newer names in the industry. When it comes to growth stocks, AMZN (Amazon Inc.) has always been considered among the most popular growth investing examples to investors and named in the top three U.S. stocks, regarding its market capitalization during the first quarter of 2021.
The stock of Amazon has previously recorded a significantly high price to earnings (also known as the P/E) ratio. Although the company is expanding non-stop, its earning per share records still manage to rise and are expected to stay on the same trend for the next five years, hovering around 30% each.
This stems from the fact that as long as that specific company continues to advance and is expected to continue its successes, investors will be willing to spend their money – whether the company is big or small. Further reasons may lie in the hindsight that certain stocks from highly expected companies fail to reach their maximum potential because of poor management despite the success of their products. This eventually leads to the downfall of these companies as well as the faith of investors.
Things You Might Have Missed as a Growth Investor
Just like other forms of investing, there is almost no guarantee that you make the desired amount of profits or even hold on to your fresh earnings. However, there are surely certain things that you can do and utilize for increasing your chances of success.
Do Your Research
In this age of information, it is critical that you do your research as thoroughly as possible on even the smallest things regarding your investments. Sometimes, researching itself may prove insufficient without further monitoring of all financial markets and possible news resources with a huge impact on the values that you are keeping your eyes on.
For instance, low-interest rates are considered a sign of increasing demand for financial assets. This also acts as one of the market conditions. If they are met, it is more likely that the growth stocks will move in a specific direction – either rise higher or just disappointedly drop.
Diversify Your Portfolio
Diversification makes your portfolios flexible and adjustable. By being well-balanced with different stocks, sectors, sizes, and liquidity, you will be able to achieve dreamt records while decreasing the risk exposure. Further risk management with repeated portfolio reviews should also allow you to make suitable changes in time, thus keeping any harm at bay.
The technology sector must be the most popular among all possibilities when choosing growth stocks for investment. It naturally possesses a stable flow of new growth stocks thanks to cutting edge products that ensure their positions in the markets as well as high expectations from investors.
Making sure that you do your research and know what is currently hot and trending in this industry may get you a chance to get your hands on extremely potential growth stocks.
Thanks to the non-stop progress of technology, it is not difficult at present for investors to look for new chances and expand their portfolios in foreign and developing markets. A balance between domestic and international investments may even save your lives when unexpected high volatility or devastating losses strikes as exotic markets experience little to no effect from certain events than your primary local ones do.
With growth investing, investors are granted chances to make attractive bets of achieving values that just significantly outshine others from the markets, given the companies they are expecting and believing in are not giving up and showing signs of progress. Be mindful that no lucrative investment comes without uncertainty, remember to do thorough research and know what growth investing has to offer so that you can make the right decisions.