Tips for Growth Investing – Concept, Tips, Benefits, Research & more
In this article, you will find out Tips for Growth Investing.
One of the primary objectives of any investor is to see their fund grow over time. There are multiple options or investment methods and strategies to opt for.
However, most long-term investors prefer growth investing over anything else.
It is one of the most popular types of investing where growth stocks are found.
Then the investors invest in them and wait for the long-term to see them grow and accumulate wealth.
So, we will discuss growth stocks tips and strategies in this article.
We will be covering the important aspects of the trading method as well.
What is Growth Investing?
Growth investing refers to the process of investing in stocks of such companies which are having an upper hand over their peers in the industry.
It is about investing in such companies where there is a high potential for value growth. For instance, in companies that have higher sales and revenue generation capability in comparison to their peers.
There are many such factors like P/E ratio, customer loyalty, brand value, competitive moat, and many other such factors which make a company stands out from the rest in the bunch.
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How to Research for Growth Stocks?
When you are analyzing the fundamentals of companies you shortlisted from top-down analysis, you need to evaluate them on the basis of –
Return on Equity
The first factor you need to consider is ROE. This is to evaluate how easily and efficiently the company is making a profit using its equity or capital.
It is one of the important factors because shareholders are the actual owners of the company. Thus the return on their shareholding needs to be evaluated.
It helps you understand how much return you will get for your investment in the company’s shares.
Projected Cash flows
The next up is the projected cash flow. It is important for the present as well as for the future.
The projected cash flow helps in understanding the business plans and expansion plans of the company. Then it helps in finding out the company by discounting the cash flows.
Earnings per Share
EPS is another crucial factor that you need to look at. It suggests how much an investor earns on each share.
However, here you need to observe whether the EPS has been rising every year or not or at least having a growth upward. As if it is increasing, the company is doing something right.
Tips for Growth Investing for Long Term Investment
Tips for Growth Investing
So, now you know how to find the right stocks for growth investment. Let us now see how you can better your growth investment experience –
Check Relative Performance
When you are buying a stock, check its Relative Performance (RP). It will help you understand how successful the company is and also help you avoid the poor companies.
This parameter can help you choose stocks that are outperforming the market each time. This metric helps you analyze the company over a period and that is segregated amongst multiple timeframes.
If you can analyze the performance of the company, you do not have to rely on hot tips coming your way from any unknown broker or advisors.
Have Patience – Tips for Growth Investing
The next tip would be holding your patience after you invest in the stock. In growth investing, you need to hold patience for your investment.
The price can rise exponentially and also drop to the lower levels. You must not sell them according to the market.
You must wait until the target price is reached unless there is something drastic like the company winding up or reached the B/E point.
Sell Loss Making Stocks
The last point says to hold patience but if some of your stocks are making losses which is beyond the permissible limit of 20% of the total investment, sell those stocks.
This is an important rule of growth investment.
Making Multi-fold Profits – Tips for Growth Investment
By being patient you can let your investment grow multiple times. If you sell off the assets and realize profit early, you can make 10%-20% profit at the max.
However, if you let it run for years, the same profit would go up to 100% and even in multiples of 100%.
Be an Optimist
In growth investing, you have to be an optimist but not an eternal one though. You need to be confident about your analysis and prediction skills until you fall on your face.
Find Best Companies – Tips for Growth Investors
For choosing growth stocks, you need to find the best-performing companies in the market. Check their ROE, ROA, EPD, and other metrics mentioned above.
Then evaluate them properly and choose the best companies in the industry.
Follow the Market
Before investing follow the market, after investing, you can ignore it to a great extent.
It is because, when you are entering the market and it is slowing down, it may erase a lot of profit of yours. However, whenever, it is in a bull run, you can be an aggressive investor.
Diversify your Investment – Tips for Growth Investing
For better returns from your growth investment, you need to invest and diversify your investments.
You can pick ten growth stocks and invest in them and if you are new to the market you can take five such stocks. This will easily mitigate the risk and help you increase the profit margin.
If a stock is winning, keep track, the day it started losing its momentum, sell it off.
It is because, once a stock starts losing its momentum, it is generally going to slow down, and eventually the price of the stock can go down south.
It can erase your profits. So, sell it off as soon as it loses momentum.
Buy Same Stocks – Tips for Growth Investment
With time, you can understand which stock is performing the best. Try to buy as many as you can of the very same stock over time. This can increase your profit percentage to great extent.
Advantages of Investing in Growth Stocks
There are multiple advantages of investing in growth stocks and they are –
- Growth investing is a high-risk high-return investment. Where you take a significant amount of risk to earn a higher return. However, this risk is mainly because of the new and growing companies. If you are investing in stocks that are already established in the market, then the risk diminishes.
- Growth investing helps in diversifying your portfolio. For growth investment, you need to find less correlated stocks, having high potential, low risk so it helps in diversification.
- For earnings from growth investment, you need to pay only long-term capital gain tax. It is because growth investments are generally for the long-term. So, the tax you pay is lesser than a short-term capital gain tax as well as income tax. This increases the value of the income you generate from the investment.
Which are the Popular Growth Stocks?
If you are evaluating growth stocks, then the good ones will have –
- If they are new companies in the high-rising industries. You need to follow a top-down approach for researching these stocks. You need to first find the industries which are growing exceptionally well. Then you need to find the best growth stocks in them. The new companies having potential can grow and surpass the market return eventually, so investing in them is a good option.
- The management of the companies you have shortlisted has to be good. They need to be professionals, knowledgeable and experienced. They need to make decisions in the favor of the company and not in the favor of themselves.
- Finally the companies you are shortlisting need to have a clear business plan for the future. They need to forecast the future cash flows easily and anticipate them. The best company would be the one with minimal risk and higher potential for future earnings.
Some of the best industries to invest your money for growth investing are –
- Technology stocks
- Healthcare stocks
- Small-cap stocks
Tips for Growth Investors – Conclusion
To conclude we can say that growth investing is all about finding the high potential stocks in the rising industries and then being patient.
Once the stock price rises to your desired level, you can sell it off and realize a profit. It is one of the best methods of investing when it comes to long-term wealth creation.
FAQs – Tips for Growth Investors
Here are the FAQs on Tips for Growth Investors –
What are growth stocks?
Growth stocks are those stocks which are having a high potential to grow in their value. The companies are new and in high rising industries.
What is the top-down approach?
The top-down approach is about researching the economy first, then industry, and finally the company.
What is ROE?
ROE is the return on equity. It is derived by dividing the net profit of a company by its total equity of the shareholders.
What is momentum?
Momentum in the stock market is the pace with which a stock price is increasing or decreasing.
Is growth investing safe for new investors?
If the new investor is aware of doing the right kind of research and can find the right growth stocks, it is safe.
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