When it comes to investing there are different schools of thought. Your investing strategy and asset allocation will depend on what you hope to get out of your investments. Are you looking to score deals on under-valued stocks or find companies that are on their way up? Let us explain how growth investing works and its potential pros and cons for the average investor. 

If you want to add growth investments to your portfolio, a financial advisor can help you identify opportunities and manage risk for those investments.

Growth Investing Basics

Many investors buy index funds or mutual funds, as these can be less time-consuming and potentially more cost-effective than trading individual stocks. However, some investors prefer to invest directly in individual companies. This could be driven by the goal of earning potentially higher returns or simply because they find it enjoyable as a hobby.

If you’re interested in selecting your own stocks, you should decide on a strategy for which stocks to buy. One common method is value investing, where you look for stocks that appear undervalued when compared with the actual or potential earnings of the company. Investors who follow this strategy believe that the market will eventually recognize the company’s true value and adjust the stock price upwards.

Alternatively, you might consider growth investing, which involves identifying companies that are experiencing rapid expansion. This often includes companies that are new to public markets and have significant potential for growth and expansion in the near future.

Growth investing focuses on capital appreciation. The general goal is to invest in companies whose earnings are expected to increase at an above-average rate when compared with their industry or the overall market. This strategy can offer high returns if the companies succeed, but it also comes with increased volatility and risk, making it suitable for those who have a higher risk tolerance.

Picking between growth and value investing depends on how much risk you are willing to take and your investment timeline. Growth stocks are riskier and can offer higher returns, but also greater losses during downturns. Value stocks, comparatively, are generally safer and less affected by market fluctuations, but grow more slowly.

How Do You Identify Growth Investment Opportunities?

Growth investments typically include stocks of companies that are expected to grow revenue and earnings at a faster rate than the average business in their industry or the market as a whole. These investments often involve technology firms, biotech companies and startups that are poised for rapid expansion due to innovative products, services, or business models.

So, if you want to identify growth investment opportunities, start by researching industries and companies that show potential for rapid expansion. Common strategies focus on sectors benefiting from technological advancements, demographic changes, or shifts in consumer habits. Look for companies within these sectors that demonstrate consistent revenue growth and are investing in market expansion. Check their financial statements over multiple quarters or years to ensure sustained growth.

Next, consider the company’s unique advantages such as innovative products, strong brand recognition, or proprietary technology. The quality of the management team is also important, as companies with visionary leaders are more likely to succeed and continue growing. Evaluate the company’s strategic plans to assess its future growth potential.

Lastly, track the stock performance and overall market sentiment towards the company. Stocks that have shown a strong upward trend may be good candidates for growth investment. However, be cautious of overvalued stocks; even companies with high growth potential may not be good investments if their stock prices are too high relative to their actual value.

What Are the Benefits of Growth Investments?

If you choose growth investments, you likely prioritize capital gains over immediate returns like dividends. Growth-focused companies, often younger and more dynamic, typically don’t distribute large dividends. Instead, they reinvest profits back into the company to fuel further growth and expansion, which can lead to increased stock values over time.

The main goal for growth investors is to see the stock’s value increase. You invest in these companies with the expectation that their market value will rise significantly, allowing you to eventually sell your shares at a much higher price than you paid. This potential for high returns is what attracts investors to the growth investing strategy.

By investing in growth stocks, you’re betting on potential. While these investments can carry more risk, the payoff if the company succeeds is substantial. This can make growth investing an appealing option for those looking to significantly increase their portfolio’s value and are comfortable with the associated risks.

What Are the Drawbacks of Growth Investments?

If you decide to go the growth investing route, remember that the tax rate you’ll pay on your capital gains will depend on how long you wait between buying and selling. Long-term capital gains are taxed at a lower rate.

You should also note that past performance is not a reliable indicator of future results. Even if a company has been growing rapidly for years, there’s no guarantee that it will continue to do so after you invest. Growth rates can decelerate or even stall, which could affect the return on your investment.

Finally, growth investing carries significant risk, especially during market downturns. Companies that expand quickly when the market is strong may also see their values drop sharply when the market conditions worsen. So, if you’re comfortable with high risk and have the financial cushion to absorb potential losses, this might not deter you. But, you should consider this volatility when deciding whether growth investing aligns with your financial goals and risk tolerance.

How to Manage Risk for Growth Investments

You can manage risk in growth investments by diversifying your portfolio. One common strategy is to avoid putting all your money into a single stock or industry. Instead, spread your investments across various sectors and companies. This approach reduces the impact of poor performance from any single investment and helps stabilize your portfolio by mixing volatile high-growth stocks with more stable investments, such as utilities or consumer goods.

You should also be proactive about monitoring your investments. Review the performance and fundamentals of the companies that you’ve invested in regularly, and keep an eye on changes in their earnings reports and overall market trends. You can implement stop-loss orders to help protect your investments from sudden market drops, which will automatically sell your shares if prices fall to a certain level.

Finally, align your investment choices with your personal risk tolerance. If you’re uncomfortable with high volatility, you might want to limit the amount of growth stocks in your portfolio or opt for relatively safer growth investments.

Bottom Line

Many investors who want their money to grow into a reasonable retirement income can probably get away with some low-fee index funds, with the ratio of stocks to bonds decreasing as retirement approaches. But for those who enjoy the challenge of researching their individual investments, growth investing offers the potential for high rewards – assuming you know how to pick winners.

Investment Planning Tips

• A financial advisor can help you pick investments to build out your portfolio strategically. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.
• And, if you want to know how much your investments could grow over time, SmartAsset’s investment calculator could help you get an estimate.

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