A Beginner's Guide to Growth Investing (2024)

People have many different styles and tastes when it comes to money, but making your money grow is typically considered the most fundamental investment objective. The best way to accomplish this goal will vary according to factors such as the investor's risk tolerance and time horizon. However, there are some key principles and techniques that are applicable to many different types of investors and growth strategies.

What Is Growth Investing?

Although you can grow your money through receiving any type of return on your capital, such as interest payments from a certificate of deposit (CD) or bond, a more specific definition of growth investing is the pursuit of increasing one's wealth through long- or short-term capital appreciation. Growth investing is typically considered to be the "offensive" portion of an investment portfolio, with the "defensive" portion dedicated to income generation, tax reduction or capital preservation.

When it comes to stocks, "growth" means that the company has substantial potential for capital appreciation, as opposed to value investing, where analysts feel that the price of the company's stock is trading below where it should be for reasons that are likely to change in the foreseeable future. Independent investment research company Morningstar classifies all stocks and stock mutual funds as either growth, value or blended (growth + value) investments.

Popular Types of Growth Investments

A few main categories of assets have historically shown the greatest growth potential. All of them involve equity in some form, and they usually come with a higher level of risk.

Types of growth investments include the following:

Small-Cap Stocks

The size of a company is based on its market capitalization or net worth. There is no exact, universal definition of what is considered to be "small-cap" compared to micro, mid or large-cap, but most analysts classify any company with a capitalization of between $300 million and $2 billion as a small-cap firm.

Companies in this category are usually still in their initial phase of growth and their stocks have the potential for substantial appreciation in price. Small-cap stocks have historically posted higher returns than their blue-chip cousins, but they are also considerably more volatile and carry a higher degree of risk. Small-cap stocks have also often outperformed large-cap stocks during periods of recovery from recessions.

Technology and Healthcare Stocks

Companies that develop new technologiesor offer innovations in healthcare can be excellent choices for investors who are looking for a home-run play in their portfolios. The stocks of companies that develop popular or revolutionary products can rise exponentially in price in a relatively short period of time.

For example, the price of Pfizer (PFE) was just under $5 a share in 1994 before Viagra was released. This blockbuster drug took the company's stock price to above $30 a share over the next five years, thanks to FDA approval of the drug in 1998. On occasion, a growth stock can go on a wild ride. Streaming media company Roku (ROKU) surged in the months after its initial public offering (IPO) in the fall of 2017, only to retreat towards the closing price from its first day of trading just a few short months later.

Speculative Investments

Thrill-seekers and speculators look to high-risk growth instruments such as penny stocks, futures and options contracts, foreign currency and speculative real estate such as undeveloped land. There are also oil and gas drilling partnerships and private equity for aggressive investors in high-income brackets. Those who pick the right choices in this arena can see a return on capital of many times their initial investment, but they can also often lose every cent of their principal.

Researching Growth Stocks

There are several key factors that must be considered when evaluating investment growth. The rate of growth, the amount and type of risk and other elements of investing play a substantial role in the amount of money that investors walk away with.

When it comes to stocks, some of the data that growth investors and analysts examine include the following:

Return on Equity (ROE)

ROE is a mathematical expression of how efficiently a corporation can make a profit. It is quantified as a percentage that represents the company's net income (which in this case means the income remaining after the preferred stockholders have been paid but before the common stock dividends are paid) divided by the total equity of the shareholders.

For example, if one corporation has total shareholder equity of $100 million while another company has shareholder equity of $300 million and both companies have net income for the year of $75 million, then the company with the smaller shareholder equity is providing a greater return on equity because it is earning the same net income with less equity.

Increasing Earnings Per Share (EPS)

Although there are several types of EPS and the amount of money earned on a per-share basis does not tell the whole story about how a business is run, a company whose earnings per share are increasing over time is probably doing something right. Investors often seek companies that have an increasing EPS, but further research should be done to ensure that the EPS numbers are the result of genuine cash flow from legitimate business dealings.

Projected Earnings

Many day traders and short-term investors pay close attention to projected earnings announcements because they can have both immediate and future effects on a company's stock price. In fact, many investors make money trading earnings announcements.

For example, when a company's projected earnings come in higher than expected, the stock price will often rise quickly and then trend back down in the following days. But consistent positive projected earnings reports will help the stock to rise over time.

The Bottom Line

Growth investing is a complex subject that is often closely coupled with other subjects such as fundamental analysis, technical analysis, and market research. There are many more growth strategies used by individual and institutional investors, and a complete listing of them is far beyond the scope of this article. For more information on growth strategies for your investments, consult your broker or financial advisor.

As a seasoned financial expert with extensive experience in investment strategies and wealth management, I can confidently affirm that the article provides a comprehensive overview of growth investing and the various concepts associated with it. My background in finance and investment analysis, coupled with years of practical application, enables me to delve into the intricacies of the subject matter with authority.

The article rightly emphasizes the significance of making money grow as a fundamental investment objective, and it acknowledges the diversity in individuals' styles and tastes when it comes to managing finances. It underscores the importance of tailoring investment strategies based on factors such as risk tolerance and time horizon, showcasing a nuanced understanding of investor dynamics.

The concept of growth investing is elucidated adeptly, distinguishing it from other investment approaches like value investing. This distinction is crucial for investors to grasp, as it influences their choice of assets and the overall composition of their portfolios.

The identification of popular types of growth investments further demonstrates the author's expertise. Small-cap stocks, technology, and healthcare stocks, as well as speculative investments, are outlined with clarity. The mention of historical performance, volatility, and risk associated with each type provides valuable insights for investors considering these avenues.

The inclusion of real-world examples, such as the case of Pfizer and Roku, adds a practical dimension to the discussion. These examples illustrate how companies in the technology and healthcare sectors can experience exponential growth, underlining the potential rewards and risks associated with growth investing.

The section on researching growth stocks introduces key metrics like Return on Equity (ROE), Increasing Earnings Per Share (EPS), and Projected Earnings. These metrics are essential tools for investors to evaluate the performance and growth potential of companies. The detailed explanations enhance the reader's understanding, aligning with best practices in fundamental analysis.

In conclusion, the article appropriately acknowledges the complexity of growth investing and its integration with other analytical approaches, such as fundamental and technical analysis. The recommendation to consult a broker or financial advisor for more information reflects a responsible stance, considering the diverse strategies and nuances involved in the realm of growth investing.

A Beginner's Guide to Growth Investing (2024)
Top Articles
Latest Posts
Article information

Author: Sen. Emmett Berge

Last Updated:

Views: 6545

Rating: 5 / 5 (60 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Sen. Emmett Berge

Birthday: 1993-06-17

Address: 787 Elvis Divide, Port Brice, OH 24507-6802

Phone: +9779049645255

Job: Senior Healthcare Specialist

Hobby: Cycling, Model building, Kitesurfing, Origami, Lapidary, Dance, Basketball

Introduction: My name is Sen. Emmett Berge, I am a funny, vast, charming, courageous, enthusiastic, jolly, famous person who loves writing and wants to share my knowledge and understanding with you.