Growth Investing: understand what it is and how it works
When someone decides to invest in companies and has their first contact with the securities market, the objective is only one: to increase equity. But there are several ways to achieve this result, and growth investing is one of them.
In this content, you will find out what this modality of analysis of opportunities in the rental market is and how it works. In addition, we will also show the differences between growth investing and a similar approach, value investing. Continue reading and check it out!
What is growth investing?
Growth investing is an opportunity analysis approach widely used mainly in the stock market .
Basically, the objective of this perspective is to use fundamental analysis criteria to select companies with great potential for growth and appreciation.
This is generally the goal of every investor. However, growth investing uses concepts that deserve attention, as they correspond to a more speculative assessment.
Growth Investing and Value Investing: what are the differences?
One way to note the speculative nature of growth investing is to compare its criteria with a similar approach: value investing.
The main objective of “value investing” is to build a portfolio of solid, well-managed and profitable companies. In the long term, the accumulation of earnings added to the valuation of the company should be responsible for the increase in invested equity.
Growth investing prioritizes certain indicators over others. A company being profitable, for example, is not as relevant as an accelerated expansion of its activities, even if this means financial loss to managers or dependence on the credit market.
In short, growth investing prioritizes the selection of a portfolio that aims to multiply capital through asset appreciation. That is, the proposal is to buy shares to sell them more expensive in the future.
What characterizes a growing stock?
You understood that both growth investing and value investing are fundamentalist approaches to opportunity selection. This means that both paradigms use indicators of a company’s performance in its own market.
Thus, a growing stock can be identified by examining its financial statements. Some points of observation of its historical performance are:
growth of the company’s equity;
variation in return margins on business assets;
level of indebtedness of the organization, etc.
In addition, a careful study of the sector itself and the projection of market growth, considering the competition of the companies and the demand, is also important for the selection of opportunities.
What are the necessary precautions and points of attention?
Because it is an assessment that considers the company’s potential regardless of its ability to generate profit in the present, growth investing requires attention and caution.
After all, the expectation of the development of a sector or the predominance of an organization in its performance scenario may not materialize. In these cases, it is common for the market to respond with pessimism, reducing the value of assets, which causes losses to investors.
The technology sector, for example, is often seen as a promising source of valuable opportunities. Many companies grow quickly, generating impressive returns for those who invest in their business models.
However, the evolution of digital solutions also tends to produce disruptions, transforming what was once innovation into something obsolete. Therefore, insecurity about the future must be calculated with rigor and strategy.
In this article you checked what growth investing is and how this approach differs from the so-called “value investments”. Therefore, be sure to evaluate the opportunities, including from different perspectives, to achieve adequate diversification for your objectives .
