Growth investing is a strategy that focuses on building returns quickly. Investors who use this method choose investments that are expected to rise in value faster than others within the same asset class or sector, or across the market.
While growth investing can result in higher earnings during a shorter period of time, it can also involve taking on greater risk. Before adopting a growth investing strategy, it's a good idea to understand the potential risks and rewards and consider your financial goals, objectives, time horizon and risk tolerance.
What is growth investing?
Growth investing is a long-term investment strategy where you look for companies, markets and assets that may outperform the overall market. Effective growth investing means giving a vote of confidence to unproven companies and focusing on the potential long-term rewards.
For example, many growth investments may appear to be overpriced. That's because they may be priced higher based on expectations that the value of the stock will increase rapidly and exponentially.
Most high-growth companies or investments don't pay dividends — and when they do, those dividends tend to be very small. That's because growth companies usually invest all their earnings back into the company to fuel its growth. Growth investors are willing to wait for bigger gains in the future rather than receiving incremental profits in the short term.
4 types of growth investments
When you're investing for growth, there are various types of investments you can choose. Growth stocks and growth ETFs are some of the most common. There are also a number of potential growth assets that carry significantly more risk.
1. Growth stocks
Growth stocks are the most common type of growth investments. These stocks belong to companies that are expected to grow faster than others in the market.
For example, Apple first went public in 1980 with a stock price of $22 per share. Since then, the stock has split five times and has increased exponentially in value. Investors who bought Apple stock early and held it throughout the company's highs and lows grew significant wealth by investing in the company.
Growth stocks are usually tied to companies with a small market capitalization, which is the total market value of all the available stock in a company. Small-cap companies are in their early stages of growth and have the potential for substantial appreciation in share price. They typically operate in large industries with room for innovation. Companies that develop very popular or revolutionary products often experience significant growth over a relatively short period of time. Technology and health care, for example, are both viable industries for exponential growth rates.
Choosing specific growth companies to invest in can be difficult and risky. Some investors have lost money by betting on the "next big thing" that never materializes.
2. Growth ETFs
Growth ETFs (exchange-traded funds) offer an alternative to choosing individual growth stocks. An ETF is a pool of investments that helps to diversify your portfolio, while potentially lowering your risk a single stock can have on your returns. A growth ETF invests in stocks where the underlying companies have the potential for rapid growth.
3. Growth mutual funds
Like growth ETFs, growth mutual funds invest in a large collection of assets that are poised to grow faster than their industry peers or the overall market. Mutual funds are different from ETFs because they are traded just once per day, after the markets close, rather than trading throughout the day on an exchange.
4. Higher-risk growth investments
Some investors seek other types of growth investments, many of which carry significant risk, such as:
Penny stocks
The term "penny stocks" usually refers to shares that trade for $5 or less. The low price means they're typically connected to companies that are troubled or have a very small market capitalization.
Futures
When you buy a futures contract, you agree to buy or sell an asset at a specific date for a set price. While you may earn high returns, you also take on the risk of the future value of that asset.
Options contracts
When you purchase an options contract, you have the right to buy or sell a specified quantity of an asset at a certain date and for a specific price. These contracts are notoriously risky because they're very complex and easily misunderstood.
Foreign currency
Investing in foreign currency typically means buying one currency while simultaneously selling another. The trick is to buy and sell at the right time based on exchange rates, but this carries risk because exchange rates are very volatile.
Speculative real estate
This type of investment involves purchasing real estate and expecting market conditions to rapidly increase the property's value. It can be a highly rewarding endeavor but also carries high risk because markets can turn quickly.
Oil and gas drilling partnerships
Drilling for oil and gas can be a highly rewarding investment — if the drillers are successful. But there's a high risk of injury, a lengthy time horizon and complete loss if the drilling is unfruitful.
Private equity
A private equity fund sponsor uses pooled funds to make investments on behalf of the fund. This type of investment carries high risk and potentially high rewards. You can't predict or choose which businesses the private equity sponsors will buy; and if they make a bad decision, you can lose your money.
While these investments can potentially pay off handsomely, they also carry great risk.
Value vs growth investing
In many ways, growth investing is the opposite of value investing. Growth investors try to pick stocks that have the potential to grow and outperform the market eventually. Value investors, on the other hand, look for stocks that are underpriced, or trading at a discount compared to their company's actual value.
A growth stock often has a high P/B (price-to-book) ratio, meaning its price is higher than the company's book value, or the amount the company is currently worth. On the other hand, value stocks typically have a low P/B ratio, which means their price is undervalued based on the company's current book value.
As a growth investor, your earnings will come from a company's ability to grow. But as a value investor, your earnings will come from the market's ability to change its perception of the company in which you invest.
While both growth stocks and value stocks can have a place in your investment portfolio, there are certain market conditions that are typically more favorable for each type of investing. In general, the best time to purchase growth stocks is during periods of economic expansion, as the growth companies are poised to grow and gain value. Conversely, periods of economic recession or downturn can be the best time to purchase value stocks, as companies are more likely to be undervalued when less money is being invested.
How to invest in growth stocks
You can invest in growth stocks by picking individual companies and purchasing their stock in a brokerage account. If you choose to make individual stock picks, it's important to thoroughly research the company, its projected growth rate and expected returns on equity. Keep in mind that company valuations are subject to change without notice, based on market factors or company factors.
Making individual stock picks can be risky because your investment is tied up in the fortunes of a single company. On the other hand, growth mutual funds and growth ETFs offer exposure to different growth companies within one portfolio. This helps to spread your risk amongst many stocks, rather than just one or a few.
It's easy to invest in growth companies with Acorns Invest. When you open an account, you can invest in growth ETFs by investing your spare change, which helps you build ownership in growth companies.
The strategies and investments discussed may not be suitable for all investors. Growth investing is subject to market and economic risks, as growth stocks tend to be more sensitive to changes in investor sentiment and macroeconomic conditions. Factors such as interest rate changes, inflation, and geopolitical events can impact the performance of growth stocks, leading to potential losses for investors. Investing in growth stocks also involves company-specific risks, as these companies may face challenges related to competition, regulation, or execution. A company's inability to innovate, adapt to changing market conditions, or manage its growth effectively can result in underperformance or even bankruptcy, leading to losses for investors.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.
