Before understanding how to start growth investing, we need to understand what is growth investing? Growth investing is a trendy style to invest in the stock market. Now, stock market investment is not that complicated as it used to be. With a consistent approach, long term thinking, cautiousness and diversification, anyone can make a solid portfolio according to their requirement goals.
What is Growth Investing?
First of all, before starting to dive into the world of growth investing. It will be useful to understand what is growth investing and what not is growth investing. Growth investing is an approach to buy stocks of those businesses that have attractive features. The characteristics could be anything easily measurable things like strong customer loyalty, formidable competitive moat, market-beating rates or a valuable brand.
Growth stocks are inclined to hold much more promising positions in the industry. A business which had unusually strong success in recent years reflects the optimism of the investors in the company. So, the easiest way to find out growth stocks is its valuation.
The approach of growth investing is, in contrast, to value investing. In growth investing, the investors focus on the stocks that have fallen from the stock market. These fallen stocks have lower valuations which show more profit prospects and more modest sales. If applied consistently, both of the investment strategies payouts well, but usually the investors are inclined towards one of them.
Growth investing is considered riskier than value investing because of two reasons. The first reason is, it involves more money. That is why there is an excellent potential for the share price fall. And the second reason is that the growth of growth stocks’ is based upon the prediction of future gains, so a slight change in investors’ perception can cause potential damage.
Steps to Start Growth Investing
Prepare Your Finances
A thumb rule of investing is that you should not buy shares with the money that you think will be required in the next five years. It is because generally, the market rises over the long term and sometimes it causes a sharp drop of 20%, 10% or more without any prior warning.
As an investor, the biggest mistake that you can make by putting yourself in a situation that during down periods, you will have no choice apart from selling those stocks. But ideally, you should buy stocks when all are selling their stocks.
So, as a growth investor, your biggest asset is your strong balance sheet. Because it protects your finances, emotions when the bear is overpowering the markets, here are some financial basics that will help you with volatile stocks.
- Maximise cash flow by raising income and reducing expenses.
- Open a brokerage account and start funding it.
- Pay all your debts, mainly high-interest credit card debt.
- Make an emergency fund of cash which is equal to a minimum of six months of expenses.
Become Comfortable With Growth Strategies
Now, you are on the path of healthier finances, so it is the time to prepare yourself with one more powerful tool, which is knowledge.
You can focus on best-performing businesses with less focus on stock prices or else you can focus on a large and well-established company which has a good history of making positive earnings. Sometimes, it makes sense to concentrate on buying stocks in the companies and industries whom you know well.
It is because you have the experience in that particular industry or company. This experience and knowledge will help you to gauge investment as possible candidates buy. It is generally better to know a lot about a small section of companies than understanding just a few things about a wide range of businesses.
To understand the growth approaches, start reading some good growth investing books like “One Up on Wall Street by Peter Lynch” and “Common Stocks and Uncommon Profits by Philip Fischer”.
Stock Selection
After all the preparations, now it is time to invest. This process starts with the determination of how much money you want to issue your growth investment approach. If you are a beginner, then start with small or with 10% of your portfolio funds. As with the time, you get comfortable with volatility; you can increase your investing funds.
The growth stocks are believed more volatile, and aggressive than the defensive stocks; hence risk plays a vital role in the choice.
If you are worried about your potential losses, step into buying growth funds because growth funds are the easiest way to get exposure to a wide range of growth shares. Numerous retirement plans promote growth-focused options. These growth-focused options can shape the basis of your investing approach.
Screening of the growth stocks is very important because there is a need to watch out for red flags which increases the riskiness of a business.
Maximise Returns
Growth stocks have a tendency to be volatile. If a stock rises above more than your expectations, you can consider selling it. And can use that profit to buy some more new growth stocks. If you are patient, then the power of compound growth will swell your account unimaginably.
Because in comparison to short term investments, long term investments make much more money. So, develop some patience in you and let your profits rise, rise and rise. That is the only way to make big money in the market. The big investors do not make big money by taking 10%, 20% of profits but they make money by thinking about 100%, 200% and more significant profits.
Bottom Line
When it comes to making money, everyone has different tastes and styles. But making your money swell is generally considered as the most basic investment objective. The best way to achieve this goal will fluctuate according to aspects like the trader’s time horizon and risk tolerance. Growth investing is a complex subject that is usually closely accompanied by other subjects like technical analysis, market research and fundamental analysis.
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