A beginner’s guide to growth investing

People have many different styles and tastes when it comes to money, but making your money grow is usually considered the most basic investment goal. The best way to achieve this goal will vary depending on factors such as investor risk tolerance and time frame. However, there are some key principles and techniques that apply to many different types of investors and growth strategies.

What is growth investment?

Although you can increase your capital by obtaining any type of capital return, such as interest paid from certificates of deposit (CD) or bonds, a more specific definition of growth investment is the pursuit of increasing your wealth through the long-term or short-term-regular capital appreciation . Growth investments are generally considered the “offensive” part of the portfolio, while the “defensive” part is dedicated to income generation, tax cuts, or capital preservation.

In terms of stocks, “growth” means that the company has huge potential for capital appreciation, not value investment. In value investment, analysts believe that due to possible changes, the price of the company’s stock is lower than it should be. foreseeable future. Morningstar, an independent investment research company, classifies all stocks and stock mutual funds as growth, value, or hybrid (growth + value) investments.

Popular growth investment types

Some major categories of assets have historically shown the greatest growth potential. All of these involve equity in some form and are usually accompanied by higher risks.

Types of growth investments include:

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Small-cap stocks

The size of a company is based on its market capitalization or net worth. Compared with micro, mid-cap or large-cap stocks, “small-cap stocks” do not have a precise and universal definition, but most analysts classify any company with a market value of between 300 million and 2 billion US dollars as small-cap companies.

Such companies are usually still in the initial stages of growth, and their stock prices have the potential for substantial appreciation. Small-cap stocks have historically delivered higher returns than their blue-chip stocks, but they are also more volatile and riskier. During the recovery from a recession, small-cap stocks often outperform large-cap stocks.

Technology and Healthcare Unit

Companies that develop new technologies or provide healthcare innovations may be excellent choices for investors looking for a home run in their portfolio. The stocks of companies that develop popular or revolutionary products can rise exponentially in a relatively short period of time.

For example, the price of Pfizer (PFE) was slightly less than $5 per share in 1994 before Viagra was released. Since the FDA approved the drug in 1998, this blockbuster drug allowed the company’s stock price to reach more than $30 per share in the next five years. Sometimes, growth stocks can go up wildly. Streaming media company Roku (ROKU) soared in the months following its initial public offering (IPO) in the fall of 2017, and fell back to its closing price from the first day of trading in just a few months.

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Speculative investment

Stimulus seekers and speculators look for high-risk growth tools, such as speculative real estate such as penny stocks, futures and option contracts, foreign exchange, and undeveloped land. There are also oil and gas drilling partnerships and private equity for high-income active investors. Those who make the right choice in this area can see a return on capital many times their initial investment, but they also often lose every penny of their money.

Research growth stocks

When evaluating investment growth, several key factors must be considered. The growth rate, the amount and type of risk, and other investment factors play an important role in the amount of funds that investors take away.

When it comes to stocks, some of the data examined by growth investors and analysts include:

Return on equity (ROE)

ROE is a mathematical expression of corporate profitability. It is quantified as representing the company’s net income (in this case, the income remaining after the payment of preferred shareholders but before the payment of common stock dividends) divided by the percentage of total shareholders’ equity.

For example, if the total shareholder equity of one company is 100 million U.S. dollars, and the total shareholder equity of another company is 300 million U.S. dollars, and the net income of both companies for the year is 75 million U.S. dollars, then the company with the smaller shareholder’s equity provides The return on equity is higher because it earns the same net income with less equity.

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Increase earnings per share (EPS)

Although there are many types of earnings per share, earnings per share does not describe the entire situation of business operations, but companies whose earnings per share increase over time may be doing the right thing. Investors usually look for companies with increased earnings per share, but further research should be conducted to ensure that earnings per share figures are the result of real cash flows from legitimate business transactions.

Estimated income

Many day traders and short-term investors pay close attention to expected earnings announcements because they can have a direct and future impact on the company’s stock price. In fact, many investors make money by trading earnings announcements.

For example, when a company’s expected earnings are higher than expected, the stock price usually rises rapidly and then falls back in the next few days. But continued positive expected earnings reports will help the stock rise over time.

Bottom line

Growth investment is a complex subject, usually closely related to other subjects such as fundamental analysis, technical analysis and market research. There are many growth strategies used by individual and institutional investors, and a complete list is far beyond the scope of this article. For more information about investment growth strategies, please consult your broker or financial advisor.

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