The Motley Fool

What Is: Growth Investing

Growth investing is a strategy that seeks out companies that have the ability to grow. Of course it can be argued that all companies need to grow. However, growth investors are looking for businesses that can grow at significantly faster rates than the market or the industry.

By and large, growth companies aim to exploit untapped segments of a market. This could be a smaller niche within a much bigger market or a completely new market altogether. In the main they are likely to be smaller businesses in early stages of development.

In some cases, these companies may not even be profitable. In fact, if they are money-making, then almost every cent of profit may have to be re-invested in the business to spur growth. Consequently, growth investors tend to be less bothered about income. Instead, they are more focussed on capital growth.

However, it is important to bear in mind that the market in which a growth company operates may be finite, which means that fast growth could come to an abrupt end. So it’s important to be aware of market size and market limits. It is also important to be aware that money is not infinite. Consequently access to ready finance is vital if growth companies are to continue growing.

Growth investing tends to be riskier than other types of stock market investment strategies. Growth companies usually carry very high valuations compared with current levels of profitability, in the expectations that profits will grow rapidly. Additionally, shares in growth companies can be highly volatile and for this reason growth investing may not be for everyone.