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Thursday, May 19, 2016

Growth Investing in Stock Markets

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This post is inline with our investing technique series of posts. In my earlier post you have understood about basics of value investing. I'll suggest to read value investing post before starting with this post. click here.

It's good if you are already familiar with value investing though!

Another major investing technique in stock markets is known as Growth investing. Growth investing is a riskier investing technique but returns are enormous.

Basics of Growth Investing in Stock markets:
Growth investing is typically focused on a company’s potential down the road, and not so much on its current share price. Growth stocks also tend to be younger companies that reinvest their earnings into the company instead of paying dividends and are identified as growing significantly faster than their competition (aka Growth At A Responsible Price). They may also be a part of industries such as technology that are experiencing fast expansion. Examples of guidelines that some growth investors follow when selecting investments include: • Historic earnings growth. For example, a minimum of 7% earnings per share (EPS) growth for companies between $400M – $4B.
• Companies with an expected 10-12% earnings growth rate over the next five years.
• Industry leaders that have beat pre-tax profit margins for five years.
• Steady or rising ROE.
• Expectations that the stock price can double in five years.

It is well known fact that everything in this world has merits and demerits, so does Growth Investing. I'll explain major merits of growth investing, followed by the cons of growth investing

Merits of Growth Investing in Stock investing:
• Successful investments may appreciate much faster than the overall market by the very definition of growth investing.
• Investment selection is focused on attractive companies with above average earnings and sales growth.
• Investors can gain exposure to cutting edge industries that are rapidly evolving and are exciting to watch.

Cons of Growth Investing in stock markets:
• Higher risk and volatility.
• Dividends are uncommon as most growth companies reinvest their earnings.
• Time intensive to evaluate the credibility of various growth projection estimates.
• Valuations could be much higher than the market average to reflect projected growth that may never materialize.

By now you will be well aware of both Value investing and Growth investing techniques of investing. It's high time to use one of them, probably the one which matches your personality and start with stock market investing.


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