Investing in the stock market is a smart way to create a nest egg for yourself. One of the easiest strategies to adopt is to buy and hold assets for the long term. But even though that is an easy way to invest, it isn't always the best way to grow your nest egg.
Growth investing is a strategy that involves investing in stocks that have the ability to rapidly increase in value. Sometimes these stocks might be ones you consider holding for a long period of time but that isn’t always the case.
Erika Taught Me
- Growth investing is a strategy that looks for stocks with high growth potential beyond the performance of the sector they’re in or the market in general.
- To find growth stocks, you can look at specific metrics, like the P/E ratio.
- Growth investing may require a higher risk tolerance because it relies on anticipating the future performance of a company.
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How Does Growth Investing Work?
Growth investing is an investment strategy that focuses on increasing the value of your portfolio by investing in high-performing stocks.
Rather than investing in assets that track major indices, growth investors look for stocks that have the potential to increase in value. Often, these tend to be startups or tech companies with a strong performance history.
Growth investing has the potential for high returns, but it also comes with significant risks. Growth companies may not have a strong base yet or could be impacted by sudden changes in the economy. Tesla, for example, is considered a growth stock. In its early years, Tesla almost went bankrupt.
That’s the kind of risk tolerance you should be prepared to stomach if you're considering growth investments that offer high returns.
Growth investing can be attached to a company’s performance but that isn’t always the case. Some growth companies can be valuable simply because it’s a popular company or because it offers features that no one else in the market offers.
Because these companies don’t necessarily generate their value from revenue or profitability, the stock price isn’t always consistent. Timing is everything when it comes to being successful with growth investing.
What Are Growth Stocks?
Growth stocks are companies that grow at a higher rate than the broader market or competitors in their industry. They usually prioritize investing profit back into the company to help it rapidly increase in value. As a result, growth stocks usually appreciate in value but don’t offer other benefits like dividend income.
One way to identify a growth stock is by looking at its price-to-earnings ratio, or P/E ratio. This compares a company's share price to its earnings per share. Growth stocks tend to trade with a high P/E ratio. This can signify high growth potential as investors flock to the stock, boosting its price.
These types of stocks shouldn’t be confused with value stocks. Unlike growth stocks, value stocks are typically undervalued. Value investors can determine the value of a stock by looking at a company’s financial statements and studying its business model. Warren Buffet is a famous value investor, prioritizing undervalued stocks that provide consistent returns over growth stocks that provide higher returns.
Both growth and value stocks are expected to appreciate in value, but the pace at which they do so differs. Growth stocks gain value much quicker than value stocks, providing a faster return.
Growth Stock Examples
Growth stocks are stocks that typically trade at a high P/E ratio. This signifies investor confidence and demonstrates the stock's high growth velocity.
Popular growth stocks include:
- Amazon
- Alphabet (Google)
- Tesla
- Meta
- Salesforce
- Shopify
- Netflix
- Etsy
- NVIDIA
- Qualcomm
- Advanced Micro Devices
- Airbnb
- AstraZeneca
- SoFi
How To Invest In Growth Stocks
If you're ready to start growth investing, you'll need to set aside some time to review your stock choices and keep track of how those companies are performing.
1. Review a company's performance
To invest in growth stocks, start by evaluating a company’s performance. You can do this by reading financial documents — like the company’s 10-K — and studying metrics that point to growth.
For publicly traded companies, this information is available on the Security and Exchange Commission's EDGAR database. Many companies also maintain investor relations websites where financial data is reported.
Once you’ve pulled up a company’s financial data, you’ll want to evaluate specific metrics to determine whether it is a good growth stock to invest in. Some of the most important metrics to look at for growth investments include:
- Earnings-per-share
- P/E ratio
- TTM (or trailing 12 months)
These data show how well a company is performing, including its profitability — and therefore whether it has the value to support high growth.
2. Purchase shares in the company
After you’ve selected companies you believe are growth stocks, purchase shares of stock in those companies. You can do this as a lump-sum purchase or by using a strategy like dollar-cost averaging.
If you don't have an investment account yet, you'll need to open one. You'll use this to purchase and sell your stocks. Some popular options include Webull, Robinhood, Fidelity, and Vanguard (among others).
If you'd prefer to have a professional help you with your investments, you can hire a financial advisor who is licensed to buy and sell securities. Just note that some advisors require you to have a certain net worth and will charge a fee for their services.
Timing is important with growth stocks, but it’s unlikely you’ll be able to time the market perfectly. Averaging out your stock purchases over time can help you start investing in growth stocks regardless of the price per share.
READ MORE: How To Start Investing
3. Monitor and react to market changes
Finally, monitor and evaluate your portfolio. Pay attention to news events related to growth stocks that can lead to sudden fluctuations in prices. Bad news — like a security breach or bad earnings call — can cause the stock’s price to temporarily dip, creating an opportunity for you to invest more in it if you think it will eventually recover.
One thing to keep in mind is that you can still adopt a growth investing strategy without going all in on a specific company’s stock. Exchange-traded funds (ETFs) allow you to buy a basket of companies all at once. Companies that track the S&P 500, for example, tend to also be growth stocks.
Investing in an ETF or index fund that includes these companies distributes risk while giving you more opportunities to capture gains across a variety of companies in different sectors.
Dividend Growth Investing
Dividend growth investing is another part of a broader growth investing strategy. Dividends are a portion of a company’s profits that are paid to shareholders. The dividend amount is determined by the board of directors and is paid out in regular installments, usually quarterly.
Dividends are a great way to generate supplemental income from your portfolio. Payments are typically deposited into your brokerage account and can be withdrawn at any time.
If you don’t want to take the cash payment, you can reinvest your dividend to purchase more of a company’s stock. This allows you to put your money to work, compounding the value of your portfolio to help it grow much faster.
Although many growth stocks don’t offer dividends, some do. Keep an eye out for these opportunities as part of your larger investing strategy.
Value Investing vs. Growth Investing
Another investing strategy that is similar to growth investing is value investing. While the premise of these two strategies is similar — to invest in stocks that will eventually appreciate in value — the approach is different.
Value investors look for stocks that are undervalued. While these can be stocks with high growth potential, that isn’t necessarily the case. Undervalued stocks are determined by the company’s operations, revenue, and profitability — not by how popular the company is.
Growth investors look for companies that have the potential to grow quickly, regardless of the company’s intrinsic value. They assume that the company’s value will grow as the stock appreciates, but this isn’t always the case. As a result, growth investing tends to come with a bit more risk than value investing.
FAQs
Is growth investing high-risk?
Growth investing can be high-risk because you're betting on a company's future performance. When enough growth investors bet on the same company, it drives up the price-per-share, increasing the company’s perceived value.
While this has worked well for some companies, like Amazon, it can also create bubbles. For example, Zoom peaked during the COVID-19 pandemic as workers shifted to remote work but today, its share price is trading at a fraction of what it was during its peak.
How do you know if a stock is growth or value?
To determine whether a stock is a growth stock or a value stock, study the company’s financials. Value stocks tend to trade lower than what they are actually worth. The value of these stocks is captured in their business operations where they generate revenue and profits. These stocks tend to be “boring” stocks and typically pay dividends. Coca-Cola is a great example of a value stock.
Growth stocks, on the other hand, are valuable because of their perceived growth trajectory. Investors believe the stock has the potential to increase in value due to things like brand value or market share. This isn’t always reflected in the company’s financials. Tesla, for example, is considered a growth stock — but the company didn’t turn a profit until 2020, even though it’s been in business since 2003.
Final Thoughts
Growth investing can be a way to increase the value of your portfolio in a short amount of time. However, it also comes with more risk, since you're investing in companies that are valued based on their buzz, rather than on their track record of business success.
The payoff can be worth it, but you'll want to make sure you're not putting all your eggs into one risky basket.
For more investing advice, listen to these episodes of the Erika Taught Me podcast, where she interviews financial experts on how to make the most of your money:
