Growth investing is the most, if not one of the most popular trading strategies around. Like value investing, it has a father (Thomas Rowe Price Jr.), and has rewarded many prudent investors with enormous returns. In the next few minutes you will learn: what growth investing is, how you can find a growth stock, and how you can avoid choosing “false growth stocks”.
Why is a growth stock called a growth stock?
Growth stocks are stocks whose companies exhibit above average growth compared to other companies in its industry group, hence the name, “growth stock”. While other strategies focus on finding value in a company or momentum in a stock, accelerating profits and sales is the main factor here. Also, high increases in price is a characteristic of these types of stocks, which is another reason they were named what they are.
How do you find a “growth stock”?
As I’ve mentioned above, you can find stocks that fit this strategy by seeing if the company has had rising sales and during the past five years. Expected rises in sales and in the next five years is also important (I recommend at least 10% growth year over year in these categories, but 20% and higher is ideal).
Is there a difference between false growth stocks and real growth stocks?
Yes, there is a big difference between fake and real growth stocks. You can easily tell the losers from the winners by just looking at the companies . If there is a huge amount of debt (most likely from over expansion) then you can cross it off your list immediately. An unsustainably high PE ratio is also common, with possible ratings being 200, 500, and 1000 (these show over enthusiasm in a stock, as well as unrealistic expectations for the company). is always required before buying any security for any meaningful period of time (day traders, you are the exception), and growth stocks aren’t excluded from this rule.
Here are some more details regarding growth investing that may help you achieve higher returns using the strategy:
1. Companies with smaller market capitalizations are ideal, since they have more room to grow and can double, triple, or become a ten bagger* relatively easily.
2. Growth stocks generally have high PE ratios as a result of its high rates of growth, but anything over 100 makes the stock in danger of being overvalued.
3. Dividends are not required in a growth stock, but if you can find one that has consistently given them out for any long period of time, then buy it. The dividend is a way of measuring a companies financial position; if it can pay it, then the company is doing fine. If it suddenly stops paying them, then the company is in deep trouble.
In conclusion, I hope that this post gives everyone who reads it a better understanding of growth investing. I myself was taught some new things researching the topic, and am better off for it. Good luck and great trading everyone!
(Down below is a link to my value investing post, so if your interested in this one, look it over if you haven’t already)
*a ten bagger is lynch lingo for a company that has grown or can grow ten times it’s previous or present price.