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What Are Growth Investing And Growth Stocks

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Growth Stocks – Definition and Meaning

Individual companies sometimes develop better than the average. So-called growth companies often open up completely new markets and industries with their innovative business models or new products and services. Such a positive development is often felt by the shareholders as well, as higher income and profits often also increase the share price and thus the return

The shares of a company that has achieved above-average success over a longer period of time are therefore referred to as growth shares. The distinction between real growth and pure speculation is often not easy, since the expected profit plays a role in growth. As a rule, however, this cannot be reliably predicted. In order to better identify growth companies, the following features have proven themselves:

What is growth investing?

The investment strategy of growth investing is closely related to growth stocks. It goes back to Philip Fisher, who was not afraid of expensive stocks after the 1929 stock crash. On the contrary: his experience showed that with above-average successful company shares he could also sit out severe drops in the stock market and make profits.

With growth investment, it’s not about whether the company is already making profits. The price-earnings ratio (P / E) is also a minor matter in growth investing. Much more important are the profits expected for the future. This is why growth supporters rely on the so-called PEG ratio (price earnings to growth) when choosing the right stocks.

In the case of growth stocks, however, wrong decisions can also lead to high losses or even total loss. Anyone who has growth stocks in their portfolio must therefore react quickly if a previous winner loses momentum. To get the specific risks of growth investing under control, founder Philip Fisher has drawn up some rules of conduct for investors:

  • Do not exclude any security from the investment universe because of size or investment segment.
  • Don’t get emotionally carried away by an investment story.
  • Don’t be narrow-minded about the purchase price of growth stocks.
  • Don’t invest in start-ups without sufficient experience.

GOOD TO KNOW: A “contrary” investment strategy is so-called value investing . In doing so, investors rely on stocks that, in contrast to growth stocks, show only slight growth – in return, however, are more stable in value.

But even investors who observe these supposed winning rules are not protected from losses and price fluctuations. As with any other investment strategy, the same applies to growth investments: growth stocks with supposed profit promises can ultimately lead to losses in the portfolio. Because nobody can predict the economic and company-dependent developments very precisely.

FIND GROWTH STOCKS

As promising as the investment strategy for growth companies sounds, finding the growth stocks of the future can be difficult, as economic trends and developments in possible growth industries cannot always be foreseen. However, some areas have produced a particularly large number of companies with above-average growth in recent years. This included telephone companies in particular, but also media and logistics service providers.

However, a lot has changed since then. The best companies from these industries are now posting stable profits, but rather weak increases in sales. That’s why they are now more of a value stock. For some time now, stocks from the biotechnology, e-commerce and high-tech sectors have been on the buy lists of growth investors. Due to the rapid development of research and technology, companies in these areas have produced a particularly large number of growth stocks in recent years.

EXAMPLES OF GROWTH INDUSTRIES IN RECENT YEARS

The rapid development of technology has caused a real boom in many areas. Some industries have particularly benefited from this, producing numerous growth stocks in recent years.

1. E-commerce

2. Streaming Services

3. Cloud provider

PROS AND CONS OF GROWTH STOCKS

Growth stocks are now very popular with investors. But they have advantages and disadvantages.

Advantages of growth stocks

Compared to value stocks, growth stocks will rise faster in price. The reasons for this is that growth companies usually invest their profits exclusively in their own company. This often increases the share price. Compared to conventional stocks, the rapid and sustained growth can often generate above-average returns. In addition, growth stocks offer the benefit of being automatically reinvested. Since shareholders are usually not paid a dividend, but rather the amount is reinvested directly in the company, investors do not have to take any further action with growth stocks. In addition, dividends that are above the tax exemption must be taxed. This tax liability does not apply to growth stocks as no dividends are paid.

Disadvantages of growth stocks

Compared to value stocks, growth stocks have a particularly high P / E ratio. This value usually deters many investors. In addition, companies with above-average growth pay little or no dividends, as the profits are usually invested in their own company. Growth stocks with dividends are therefore rather a rarity.

In addition, the rapid development of the supposed growth industries, such as e-commerce, biotechnology and high technology, creates a greater risk. Because often growing companies can no longer meet their profit expectations for the coming years. If a supposed growth stock is in free fall, investors need to act particularly quickly to keep losses as low as possible.

To conclude, growth stocks offer great potential – but they also involve great risk. Because it is often not easy for investors to differentiate between real growth and pure speculation. In addition, the forecast growth often cannot be maintained. Unexpected management decisions can also cause growth stocks to slide. If you want to focus on growth companies with growth investing, you should therefore find out about the advantages and disadvantages and not ignore the risks.

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