In this article, we’re going to go over what growth investing is and its pros and cons so you can make an educated decision about whether growth investing is for you.
We all have heard the grand old success stories of investing in big, safe conglomerates like PepsiCo, Ford, or Procter & Gamble. If you’re familiar with the legendary investor Warren Buffet’s approach, you know exactly what I’m talking about. Make slow and steady gains, and don’t make any risky investments.
On the other hand, if you were to follow such advice, you would probably have to wait decades before cashing in. If you’re anything like me, you’re probably not eager to wait for 30 years before comfortably retiring. That’s why growth investing may be perfect for you. Do you want to know why?
Table of contents:
1. What Is Growth Investing: Categories, Examples, and Definitions
In essence, growth investing comprises startups, smaller companies, and those that show promise for future growth. The aim, obviously, is to maximize your returns sooner rather than later.
The primary purpose of growth investing is increased capital appreciation. In other words, you’re looking to buy in cheaply and capitalize significantly over time. As the name suggests, growth investing prioritizes the growth ratio of a given company rather than the share price itself.
Analogically, growth investors will primarily seek companies with above-average growth rates, even if the share prices are somewhat high. In essence, you’re paying a bit extra for the promise the company shows.
a. Categories of Growth Investing
The three most popular types of growth investments are Small-Cap Stocks, Technology Stocks (grouped on the Nasdaq 100 index), Healthcare Stocks, and Speculative Investments. All three categories show excellent growth potential, but since nothing comes without a price, they also involve a higher level of risk.
b. Small Cap Stocks
Generally, companies with a capitalization between $300 million and $2 can be considered small-cap companies. Usually, these companies are in the initial phases of growth but show a lot of promise for further growth. Compared to large-cap stocks (established and well-recognized corporations), small-cap stocks, by and large, come with higher risk and volatility and higher returns.
c. Technology Stocks
Tech stocks have repeatedly shown why they’re the go-to for growth investors. Historically, tech companies like Apple have multiplied their value many times over through single product releases (e.g. the Apple iPhone released in 2007). Considering the immense growth of tech giants like Google, Microsoft, and Apple, tech companies and startups are a major target for all growth investors.
d. Healthcare Stocks
The most recent example of rapidly-growing healthcare stocks has been documented along with the authorizations of covid-19 vaccinations when companies like Moderna and Pfizer experienced noticeable spikes in their stock prices. The global covid-19 pandemic served as a reminder that healthcare stocks show a lot of promise for rapid growth and should be on every growth investor’s radar.
e. Speculative Investments
This one’s all about high-risk, high reward. Think penny stocks, foreign currencies, undeveloped property, or cryptocurrencies.
Speculative investments carry the potential for more significant returns on capital; however, at the same time, they generally are much higher risk than other types of investments.
One of the most significant differences between a speculator and an investor, investors will generally focus on long-term, multi-year, and sometimes decades-long secular trends. On the other hand, speculation focuses on shorter duration, sometimes as short as a couple of weeks. This can be attributed to the fact that different markets show different lengths of short- and medium-term trends.
2. Dividend Growth Investing – What Is It and How To Choose the Right Stocks
Simply put, investing in dividend stocks is purchasing the stocks of publicly traded companies that are proven to pay dividends regularly. The end goal is to continually receive dividend payouts at previously-established intervals. The goal of dividend growth investing is to be safer and benefit from more rapid growth rates.
When searching for the right dividend growth stock to put your money in with as little risk as possible, you’re going to be looking for companies that:
- have a proven record of consistent growth in longer-term
- are known to pay dividends at regular intervals
- cover their expenses
- are shown to have a continuous cash flow
- have historically increased the dividend payouts as they grow
Compared to growth investing, dividend growth investing is a better option for those who value liquidity and want to receive payouts at regular intervals.
3. Value Investing vs Growth Investing
As mentioned before, growth investing is a strategy that involves buying or acquiring shares of companies that present a strong growth potential, which can ultimately generate growth in your capital. Unlike value investing, growth investing involves investing in companies that have not yet reached their full potential.
Investing in companies that show both the potential for rapid growth and the ability to compete with other, often larger, companies requires thorough research. Unlike investing in well-established companies, like the aforementioned Procter & Gamble or PepsiCo, Inc., growth investors take on more risks in the hope that the company will grow so that they can profit.
a. Growth stocks vs Value Stocks In a Nutshell
Growth stocks are generally more expensive. In part, you’re paying because the company is considered promising. You’re paying a higher price for a stock because you expect to reap more short-term returns.
On the other hand, value stock prices can be considered low relative to their profits. They’re widely known to be less risky as they have already proven their ability to succeed and remain capable of generating profits. The downside, obviously, is that these are far more steady and can’t be expected to bring high returns overnight.
4. Which One Is Better For You?
It’s a new-school versus old-school thing. If you’d ask Warren Buffet, he’d probably tell you that getting rich fast is a fool’s game. Invest in Coca-Cola and make money over the next 40 years.
That said, not everyone has the patience, and for good reasons. Value investing is not for people looking to live in the present.
There’s no hiding the fact that growth investing can be pretty risky. You’re paying more for stocks that have no absolute guarantee of succeeding. To some extent, you’re betting on a company’s potential for success.
Growth investing is generally more suitable for younger people still in the early stages of their investing careers and can take more risks. Either way, it’s always important to look at your particular situation and make a sound investing plan before deciding on any particular strategy.