Some investment strategies are conservative and aim for slow and steady growth. Others are more aggressive and accept higher risk and volatility in exchange for the chance of getting oversized returns.
Growth investments fall into this latter category. It’s about buying stocks and funds that are expected to outperform the market as a whole.
Effective growth investors can make significant profits. However, a growth investment strategy is not suitable for every investor portfolio. Is it right for you We’re going to take a closer look at growth investments so that you can decide for yourself.
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What does growth invest?
Growth investing is a strategy that prioritizes buying stocks that are expected to rise faster than their competition. Often times, the goal is to buy stocks before they actually take off. You’re essentially hoping to get to the game early and catch a ride to big returns.
Dividends typically play a lesser role in choosing stocks for growth investors. Instead, they are primarily hoping for the stock’s share price to surge so that they can enjoy a big payday when their stocks are sold.
Growth investors should not be confused with traders. Unlike day or swing trading, growth investments often still involve a long-term mindset. Growth stocks can generate dramatic returns over several years or decades. However, there are also risks to long-term growth investments as market volatility can easily change a given company’s assets.
Growth investing is also different from value investing, although both strategies rely heavily on fundamental analysis. With value investments, investors look for undervalued companies with established financial data and often more price stability.
Common types of growth stocks and funds
Although growth stocks can come from any industry, certain sectors regularly produce growth stocks. Here are three examples:
When you explore the market for growth stocks, you can find companies from a wide variety of industries. However, the sectors mentioned above can be a good place to start your search.
How to evaluate growth investments
If you’re looking to become a growth stock investor, it can be disappointing to learn that not all growth investors use one universal formula. There are a number of factors to consider before proceeding with any particular stock, mutual fund, or ETF.
You can evaluate the potential growth of an investment using a combination of quantitative and qualitative measures. It’s important to understand that your growth investment decisions always involve a degree of subjectivity. But here are some helpful measurements to help inform your decisions.
In addition to these measurements above, you should also consider less measurable aspects of a business. These include the brand loyalty of the customer base, patented innovations that could change the market, and other points of interest that set the company apart from the competition.
connected: Best valuation ratios for stocks
Who should try to invest in growth?
While growth investing can be a good strategy for some investors, it is not for all. You need to consider your own investment goals before diving into growth investments.
Growth stock investors seek high returns. However, the potential for high returns comes with increased risk. With that, you need a relatively high level of risk tolerance to comfortably invest in growth stocks.
Beyond the debate between growth investing and value investing, you should decide whether you want to invest in individual stocks at all. It can take time and energy to effectively manage a growth stock portfolio. Do you have the time to devote yourself to this task?
If not, you can devote a small portion of your portfolio to individual stocks while investing the majority of your money in an ETF or mutual fund that invests in growth stocks. For even broader diversification, you can also invest in index funds that contain a mix of value and growth stocks.
Growth investments can result in an investor benefiting from investments that outperform the rest of the market. It can take time and energy to pursue these riskier investments, but they could be worthwhile in the long run.
To start investing in growth (or any other investment strategy), you will need a brokerage account. Here are some of our favorite brokers. Would you like to learn more about how to start investing? Check out our free resources!