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Investing in growth shares means investing in companies that are already outperforming their competitors and the overall market. This can reap sufficient profits. But because growth stocks can be particularly volatile, it takes careful planning and due diligence to succeed in growth investing.
Growth stocks are shares of companies that are expected to outperform their competition in sales, earnings and market returns. These are usually “hot,” well-established companies that draw a lot of buzz and have a strong customer following.
As the name suggests, these companies are growth-oriented, so they often have higher valuations and price-to-earnings multiples than the competition. Be aware from this as you study stocks before you buy from your brokerage.
Many investors conduct extensive research to identify growth stocks with the potential for high, long-term returns. Investment research firm Validea.com builds and tracks model portfolios based on different growth strategies devised by market gurus. Here are some of their highest-performing growth portfolios and how they compare to market benchmarks.
|Portfolio||Annual return||Annual return of the S&P 500||Highlight||Based on||Top 5 holdings|
|P/B Growth Investor||16.0%||7.6%||Since 2006, this portfolio has returned 809.9%, outperforming the market by 615.1%||Partha Mohanram|
|Small-Cap Growth Investor||14.5%||8.0%||Since 2003, this portfolio has returned 970.4%, outperforming the market by 683.9%||Motley Fool|
|Growth Investor||11.8%||8.0%||Since 2003, this portfolio has returned 612.5%, outperforming the market by 326.0%||Martin Zweig|
The easiest way to invest in growth stocks is to purchase shares of funds that invest in growth-oriented companies. Here are some examples.
Investing in growth-stock funds, especially ETFs, can be a great move for beginners.
By purchasing a share of a growth stock fund, you’re investing in a portfolio of stocks professionally managed for you. So it takes the time and risk of picking these stocks out of the equation. And as you track the performance of these funds throughout different market cycles, you can see how comfortable you are with growth-stock investing.
You can use digital stock screening tools, company financial statements and other resources to identity growth stocks yourself. Before you start, you’ll want to do your homework on how to analyze a company stock. Get familiar with terms like price-to-earnings (p/e) ratios and gross margins.
When you’re ready, you’ll want to identify companies that meet characteristics like the following.
You should do your own research and due diligence to find the growth stocks you’re comfortable investing in. But here are a few more examples.
If screening stocks isn’t for you, try growth-stock ETFs. Here are a few to get you started:
Growth stocks tend to sell at high prices. And because these shares come from growth-oriented companies, they may take on considerable risk. This means growth stocks can be more volatile than others.
In addition, succeeding in growth investing depends on accurately predicting future growth. This is why your time horizon is also crucial to growth stock investing. Most experts suggest you invest in growth stocks with the intention of holding these for at least 5 years.
But the market can take sharp drops within that time frame and a company may never blow up like you expected it to. It may get beat by another. So you may not want to buy growth stocks with money you would need in the next five years.
Some advisors recommend you begin by investing no more than 5% of your portfolio in growth stocks.
Investing in growth stock funds can help you take a passive approach to growth stock investing. This can give you a taste of how you would stomach the ups and downs.
Growth-stock investing can generate strong returns from companies expected to outgrow the competition and even the market as a whole. But succeeding in growth-stock investing takes considerable risk. You need to be able to stomach big losses. And you need to carefully analyse and screen for the best growth stocks.
Many investing platforms offer tools that can help you do this. But some are more effective and user-friendly than others, so make sure you compare stock-trading platforms.
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