When done correctly, growth investing can yield exceptional returns. You can continually move your capital into companies with the best growth prospects. However, success with growth investing depends on timing. Growth stocks often form bubbles, and investing in them before a bubble forms can yield higher returns. However, investing after a bubble bursts can lead to dramatic price drops. For these reasons, growth investing is often considered risky. This article will discuss some of the benefits and risks of growth investing.
In the context of growth investing, you will invest in a company that is rapidly growing and making profits. Growth stocks typically belong to emerging markets or industries with a rapidly expanding market. You should aim for younger companies with a competitive advantage. The key to growth investing is monitoring key metrics. Investing in the right company is a key component of long-term wealth creation. Growth stocks typically have a higher P/E ratio, which means the value of your investment is rising.
If you are new to growth investing, start by investing 10% of your money in this type of stock. Increase your investment gradually to the full 10% of your portfolio. Keep in mind that growth stocks carry higher risk than defensive stocks. However, a long-term investing horizon will help you diversify your portfolio and allow for more growth. So, it is a great idea to learn as much as you can about growth investing before committing all of your money.
Another key benefit of growth investing is the potential for large capital gains. Many growth stocks do not pay dividends, but the potential to generate large profits allows you to hold on to your investment even during economic slowdowns. Therefore, growth investing requires patience. If you are prepared to hold on for a long time, growth investing can help you generate considerable profits. So, consider both growth investing strategies and get the most out of your investment. If you want to achieve substantial returns, invest in the right companies. You should be able to find a balance between growth and value investing.
Growing companies may not be able to achieve the growth they promise investors. While companies that disrupt industries are attractive, their success may be short lived. For example, BlackBerry came out with a revolutionary smartphone, but Apple quickly replaced it with a new product and better technology. While investing in high-growth companies might be appealing, keep in mind that the company must still be profitable to remain relevant. This helps you minimize your risks of investing in high-risk companies.
The father of growth investing, Thomas Rowe Price, Jr., is often credited with popularizing the concept of identifying companies with high earnings growth over several years. Price’s ideas helped to shift the thinking of investors at a time when stocks were often considered short-term investments. The book Common Stocks and Uncommon Profits has remained a valuable reference for investors. It’s the best book to read to understand growth investing.