What is Growth Investing? A Beginner's Guide to Growth Investing

Making investments ensures financial stability for the future and leads to wealth accumulation. One of the most sought-after investment for long-term wealth accumulation is growth investing.

Aug 25, 2018 10:08 IST India Infoline News Service

Securing their future financially remains one of the top priorities for everyone. But with increasing prices, it is difficult to maintain a comfortable lifestyle on a fixed income. Thus, looking for alternative sources of income has become very important to beat inflation.

Making investments ensures financial stability for the future and leads to wealth accumulation. One of the most sought-after investment for long-term wealth accumulation is growth investing.

Without any further ado, let us understand what growth investing is and how you can invest into growth assets.

What is Growth Investing?

It is an investment technique in which the strategy is to focus on the capital that you’ve invested. The investment is made in growth stocks or assets which are expected to give better returns than the market or the industry average. Here, the focus remains on wealth accumulation by higher capital gains in the long-term. It is alternatively called a capital growth strategy.

While making a growth investment, it is very important to keep the investment for a longer term, as short-term investments are not really effective for this strategy.

Beginner’s Guide to Growth Investing

As a first-timer, you might have several questions popping in your mind regarding growth investing. Let us address them to clear your doubts on growth investing.

·         Why Growth Investing?

You should opt for growth investing if you are looking for long-term financial stability and wealth accumulation.
 
·         How to Identify Assets for Growth Investment?

Growth investment involves picking fundamentally strong stocks. These stocks have a promising future compared to other stocks in their sector and will have an edge in terms of returns in the long-term. While choosing a stock for growth investing, it is important to ensure some fundamental factors such as the revenue model, cash inflow, the company’s executive board, market, competition, growth prospects with respect to the economy, etc.
 
Researching these factors would let one know if a stock suits the growth investing strategy or not. You could easily get an insight by studying the company’ balance sheets and reading up more about its history, endeavors, and goals from its website or other valid sources.
 
·         Types of Growth Investments

Here are the different types of growth investments which you can consider:
 
o   Small-Cap Stocks: Companies which lie in the suit of small-cap are those that are still in their initial growth stages. This makes them more promising in terms of future growth prospects. At the same time, since these companies are still in a nascent stage, the affordability of the stocks is higher. This enables you to buy a bigger lot of their shares by making a decent investment.
 
o   Technology and Healthcare Stocks: These companies are a good choice for growth investing. The primary reason being they are innovation-driven, which increases the scope of their growth prospects. Secondly, history is a witness to the fact that revolutionary innovations do exceptionally well in the market as they target a wider audience, thus resulting in exponential growth. It is due to these reasons they abide by the virtue of growth in the investment.
 
o   Speculative Investments: Even speculative stocks could bring in a fortune in terms of growth investing as they come at a higher risk. If you are choosing a speculative investment, make sure to practice caution and invest only your surplus funds with due diligence.
 
·         How to Identify a Growth Stock?

Before taking the final call on your growth investment, ensuring whether the asset actually fits the criteria of optimal returns is very important. Due research and analysis are very helpful in this context. Given the stock already fits the theoretical aspects, it is equally important that it matches with the calculative analysis as well.
 
Here are a few parameters that could be helpful in analyzing whether a stock is a growth stock or not:
 
o   Return on Equity: This indicates the profit-making potential of the company. It is calculated by dividing the net income of the company with the total equity of the shareholders.
o   Increase in Earning per Share (EPS): An increased EPS ensures better growth prospects. Hence, it is important that you analyze whether the EPS has increased with time or not.
o   Projected Earnings: It gives an insight about the company’s expected growth and can act as a good indicator for a growth investment.

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