Growth Investment is a style and strategy for investing in which the focus is on increasing the capital of an investor. Growth investors typically invest in markets with high growth potential, which are mostly low market value or stocks that are expected to generate much higher-than-average returns relative to their peers or the market as a whole. In this article, you will learn how to invest in growth and how to do it in simple language.
In the world of economics, “investment” refers to the purchase of an asset or anything of non-consumption value in the hope of raising the price or earning income from that asset. An investment is a purchase of a commodity that the investor does not need at the moment, but that commodity will bring him profit or income in the future. Investment is not necessarily equivalent to “speculation or speculation”, because the result of investment is the production of wealth, but the purpose of speculation is merely profit, and this profit may not lead to the production of wealth.
Depending on what type of asset the investor chooses to buy and what his vision is for the future of that asset, the investment is divided into two types of growth investment and value investment.
What is Growth Investment?
“Growth investing” is a type of investment in which the investor buys an asset, stock, or commodity and retains ownership of the asset for a relatively long time, hoping to increase the price in the long run. This type of investment usually leads to the growth of a start-up business, and in return, as the business grows, the value of the stock increases and the investor makes a profit. In growth investing, it is not about earning money on a monthly or annual basis, and the goal is only to increase the price of each unit of stock or asset in the long run, and the profitability from selling the stock or asset.
Growth investors are mainly looking to invest in industries that have very high growth rates and use new technologies. In this way, the investor seeks to profit from the increase in the share price at the time of sale, not to receive income through the ownership of an asset or a shareholding in a company. In fact, many companies whose stocks are prone to growth use that revenue to grow their business instead of making a profit.
Growth investing is attractive to many investors, as buying shares in emerging companies can be a significant return if they succeed. However, most of these companies have not passed the test in the market and have a relatively high risk.
Growth investors are interested in small and young companies with high potential. Their idea is that these companies will thrive and expand, which will lead to the growth of the company’s revenues and ultimately increase the company’s stock price in the future.
Types of growth investment methods
A number of specific assets have historically shown the greatest potential for growth. They all have common features and high risks. Here are some of the best ways to invest in growth:
Stocks or assets with low market value
The size of a company or asset is determined by its market value. There are no universal and precise criteria for distinguishing between companies with very low, low, medium and large value, and in each market one asset or one stock is measured relative to the total market. In the New York Stock Exchange, for example, companies worth between $ 300 million and $ 2 billion are small. As another example, in the current state of the digital currency market, currencies with a market value of less than $ 10 million are considered small. In the Iranian stock market, stocks with a market value of less than 10 billion tomans are considered small.
Companies in this range are usually at the beginning of their growth trend and their stocks have high price growth potential. These companies have good profitability on the one hand, and high risk on the other. Usually during the recovery period after a recession, these companies have much better returns than larger companies.
Technology and health related stocks
Companies that develop new technologies or innovate in healthcare can be a good option for growth investors. Shares of companies that produce popular or revolutionary products can rise exponentially in a relatively short period of time.
For example, shares of Pfizer, the world’s largest pharmaceutical company, were below $ 5 in 1994. But after the production of Viagra, and with the recognition of this drug by the US Food and Drug Administration in 1998, the price of Pfizer per share reached more than $ 30.
One of the most important technology-related businesses that has experienced significant growth in recent years is Blockchainchain technology and digital currency activities. Very attractive projects that are active in various fields related to new technologies, use Blockchain technology to advance their project.
Projects such as IOTA in the field of Internet of Things, Block Stack in the field of Internet browsers, PotCoin in the field of health, Newmirer (NumeraireIn the field of artificial intelligence and PowerLedger in the field of energy are examples of Blockchain projects that can be invested in the form of technology-related growth investment.
Speculation-related stocks or assets
Speculators and investors looking for excitement are usually interested in risky trades such as futures, lease agreements, currency pairs and real estate such as untouched land. There are also private companies active in the field of drilling and extraction of oil and gas, which attract the attention of these investors.
Investors who make the right choices in this area can make several times as much profit as their initial capital. But some of these investments may cause some of the capital to be lost.
Assess the potential of a company or asset for growth
Investors should carefully evaluate the growth potential of that company or asset before buying a stock. There is no absolute formula for this evaluation. Every investor needs an individual interpretation of the objective and subjective factors related to the stock and must be able to judge these complex conditions. Some growth investors use certain methods or criteria as their analysis framework. But in addition to this framework, the current conditions of the company and the fundamental analysis of the share must also be considered. One of the most important factors to consider is comparing the current state of the company with the history of the company’s financial performance as well as the performance of the relevant industry in the past.
In general, growth investors pay attention to five basic factors in choosing a stock that is prone to growth.
Significant growth in price history
A company that is good for investment growth should have a good track record of revenue growth over the last 5 to 10 years. The minimum amount of cash profit of the company per share depends on the size or smallness of the company. For example, a minimum profit of 5 percent is good for companies worth more than $ 4 billion, 7 percent for companies worth $ 400 million to $ 4 billion, and 12 percent for companies worth less than $ 400 million. The main idea is that a company that has grown well in the past will continue to grow in the future.
Hope for significant price growth in the future
A profit announcement is an official statement issued by the company once every three months in which it announces the company’s profitability to a certain period of time. These statements are issued on specific dates during each financial quarter and provide the company with an estimate of revenue for the next quarter. These estimates attract the attention of growth investors and persuade them to examine the profitability of these companies.
Profit margin is very high
Profit margin is obtained by dividing the profit from the sale of goods or services after deducting all expenses (except taxes), on the company’s sales. This is a very important factor in evaluating a company’s profitability. Because a company can have great sales but the revenue from that sale is small. This could indicate poor management of costs versus revenues. In general, if a company’s profit margin is higher than the average profit margin in the last 5 years, as well as the profit margins of other companies, it is a good option for growth investment.
High return on stocks or assets
The Company Return on Returns (ROE) calculates the firm’s profitability by determining the return the company has made on the capital deposited by shareholders. This parameter is obtained by dividing the net income by the share of each shareholder. Comparing the company’s current stock returns with its average over the past five years, as well as comparing this factor with other companies, can be a good criterion for identifying companies that are suitable for growth investment. Stable or growing stock returns indicate that the company’s management has chosen the right path and is leading the business properly.
Stock or asset performance
In general, if the value of a stock does not double in five years, it is probably not a good option for capital growth. Keep in mind that with only 10% growth in one year, the value of the company will double in 7 years. To double the value of the company in five years, an annual growth of 15% is enough, this number is certainly easily achievable for young companies operating in developing industries.
Value investment or growth investment?
Opposite to growth investment, in which shareholders hope to increase the value of their shares in the future, is “value investing”. In this style, investors receive a portion of the company’s revenue on a monthly or annual basis.
Some analysts see growth and value investment as exactly the opposite. Value investors are usually looking for stocks that trade below their intrinsic price. While growth investors pay attention to the fundamental analysis of the stock and ignore the indicators that show the stock is trading above its price.
Value investors are looking for stocks whose intrinsic value is higher than the trading price, this is called “trading hunting”. But growth investors focus on a company’s potential in the forward perspective and do not pay much attention to the current price. Unlike value investors, growth investors may buy stocks whose price is higher than their intrinsic value, arguing that the intrinsic value of the stock will grow in the future and will go beyond current valuations.
The greats of growth investment
Growth investment is a concept that has a long history in capital markets. Many individuals and institutions have been active in this field over the past several decades and have achieved great success. In the following, we will introduce three of the most prominent investors in this field:
One of the big names among growth investors is Thomas Rowe Price Jr., known as the father of growth investors. In 1950 he grew the fund “T. Founded Rowe Price. The fund had an average profitability of 15% for 22 years. Today, T. Rowe Price Group is one of the largest financial services companies in the world.
Philip Fisher is also one of the greats in this field. He published his experiences in growth investing in a book called “Conventional Shares, Unconventional Profits.” He emphasized the importance of research, especially through networking, and is today recognized as one of the most popular pioneers of growth investment.
Peter Lynch, who manages the Fidelity Investments’ legendary Magellan fund, is pioneering a combined model of growth investment and value investment. This method is currently referred to as the “Growth at a Reasonable Price” strategy, or “GARP” for short.
Growth investment is one of the complex concepts of the capital market. In this type of investment, investors do not seek to earn a monthly or periodic return, and their focus is on the long term, buying the stock or asset in the hope of increasing its intrinsic value and later selling it with profits that are usually very large and significant. This concept is often tied to other important topics such as technical analysis, fundamental analysis, market assessment and asset conditions. There are various methods and styles for investment growth, the choice of which depends entirely on the investor person or entity.