What is Growth Investing? How growth investing can be a successful strategy for investors?

INVESTOPAPER

Basically, growth investing is all about adopting a strategy by focusing on increasing an investor’s capital. The growth investors prefer to invest in those companies that generate a high return on the capital invested. These companies provide the return greater than the average return of that particular industry. But the investors are often in a dilemma to invest in this type of companies and hence the possibility of big return goes untried.

Thomas Rowe Price Jr. popularized the concept of growth investing. Hence, he is also regarded as the ‘father of growth investing’. Philip A Fischer and Peter Lynch are also advocates of growth investing. It is one of the successful methods of investing that was followed by these investing greats.

The famous saying of Warren Buffett “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” reflects the growth investing strategy at its core.

Growth investing includes selecting those companies with huge potential for growth and capital appreciation. Growth investors generally focus on technological companies, emerging markets, small-cap companies, etc.

Some of the attributes of growth investing are as follows:

a) Capital appreciation: 

If small companies go big, then shareholder’s profit will skyrocket. Growth investors can reap the benefits for the time they wait for the stocks to go up. There is a possibility of a higher return in the long run. Generally, these companies do not provide a cash dividend. However, the sharp increase in share price more than compensates for the undistributed dividend. This way, the shareholders can generate maximum return on their capital investment.

b) High Risk:

Growth stocks entail greater risks. Companies with huge growth potential usually trade at higher market prices relative to their current earnings. Similarly, emerging/small companies are riskier in nature.  As a result, growth investors have to take a higher level of risk in order to maximize their return in growth stocks. All growth stocks do not succeed in the long run. Those that succeed will provide lofty returns to the investors.

c) Diversification:

Including growth stocks in the portfolio can be a good way to diversify your investments. Dividend and value stocks can minimize the risks of the portfolio. On the other hand, growth stocks carry the potential to maximize the value of your portfolio.

The basic of investing is to invest sensibly or rationally. Growth investing is one of the popular techniques that is also adopted by many Nepalese investors. But it is necessary to consider that you have to take a high risk to get a higher return by using this strategy.

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