Among the various types of investors, such as risk taking, conservative, and growth investors, the latter believe in an investment strategy that focuses on capital appreciation. Growth investors invest mainly in companies that give them an above-average growth.
Growth investment funds have diverse portfolio stocks that focus only on capital appreciation, regardless of dividend payout.
Why growth investment?
Growth can happen only if there are profits. Growth investors focus on the future growth of a company in contrast to value investors, who believe in present growth. The idea behind investing in companies whose earnings are expected to be above average is the belief that growth or earnings will lead to higher stock prices. A few factors such as profit margins, past performance, revenue growth, and effective use of funds are the bases of growth investment.
Growth investment sectors
Growth stocks do not earn considerable dividends because such companies use their earnings for expansion. Growth investors cherry-pick individual stocks or exchange-traded funds (ETF) that show growth potential or future profits. Their approach is to take on sectors characterized by rapid growth possibilities, such as healthcare, technology, and other sectors related to these sectors. Given that the growth and development possibilities in these sectors are endless, these sectors are the first picks of growth investors.
To simplify the stock picking process, growth investors invest through mutual funds or ETFs that select and trade a bouquet of healthcare and technology stocks.
Tools for growth investors
Although there is no specific formula for analyzing growth stocks, price-to-earnings (P/E) and price-to-book (P/B) ratios help investors understand the performance of a stock or a company.
Based on the P/E ratio, investors can compare two similar companies and their results. The P/B ratio is another analytical tool for growth investors to identify stocks with considerable growth potential. A growth investor looks for profits through capital gains by using these tools.
Growth investment strategy
It would be interesting to know the strategy used by growth investors for selecting stocks. It is important to understand their rationale behind choosing certain stocks or what they look for in a stock to judge its potential. A growth investor is concerned with the net earnings of a company, as well as its historical earnings. A high-earning company is the best bet for a growth investor. Moreover, the company should have strong profit margins to have growth potential. Performance matters to a growth investor. If a stock cannot double in value in a maximum of five years, it is not considered a growth stock. A good level of earnings is a sign that a company is growing. These are some of the parameters that growth investors consider in a company or a stock while making a strategy.
A growth stock is expected to grow by 10% to 20% annually. A growth investor can evaluate stock performance by using various techniques and tools, as well as by adopting new investment strategies. Such investors believe in growing their investment and profits.
