Investors crave stocks that have a lot of growth potential as it means their investments have the opportunity to become very profitable. That is why they search for stocks in growing industries that might become leaders in their respective fields.
Finding new opportunities with huge potential to invest in will help bolster your portfolio, so here is the investing term explained and a good example of a growth stock.
What is growth investing?
Growth investing is an investment strategy that focuses on increasing an investor’s capital. As these shareholders want to maximize their gains, growth investing is also commonly referred to as a capital growth strategy or a capital appreciation strategy.
Usually, growth stocks are young or small companies whose earnings are predicted to jump at an above-average rate compared to other similar companies or the overall market.
Growth investors think about the profit they could get when they sell the stock as opposed to the dividends they might get by owning shares. Most growth companies usually don’t even pay a dividend as they want to use the cash to expand their businesses.
There are a few things growth investors look out for when analyzing a stock to see if it is worth it. They look at the company’s history of earnings growth to see how strong it is, if the business has forecast for higher earnings in the future, strong return on equity, solid profit margins, and the stock’s general performance.
Growth investing or value investing
Growth investing is the opposite of value investing, which involves buying stocks that are trading at less than what analysts believe they are worth, bargain-hunting investing, if you will. While value investing focuses on stocks trading for less than their intrinsic value, growth investing involves looking at the company’s future potential and pay a lot less attention to its current stock price. So, growth investors may even invest in a stock that is trading higher than its present intrinsic value as they believe the company’s value will grow and will then outpass its current valuation.
Should I buy growth stocks?
While growth investing can be very tempting as the lure of impressive returns can be attractive, there are still risks. These companies are at the start of their business journey so investors do not know how things are going to play out. They might be widely successful or they could fail as many young companies do. However, in general growth investing is a great strategy and is very popular.
If you want to buy growth stocks, one great tip is to look for companies in rapidly expanding markets where new technology is being created.