What is a Growth Investing Strategy? & 7 Pros & Cons (2024)

When it comes to investing your money, you have plenty of options. Whether you’re investing a portion of your income to save for your retirement or to pay for a child’s education, it’s important to understand the various strategies that are available to you before you decide when and how to invest.

At Addition Financial, we often discuss investment strategies, such as a growth investing strategy, with our members. A specific approach that comes up is a growth investing strategy. To help you choose the right investments for your needs and financial goals, here’s what you need to know about a growth investment strategy and seven pros and cons to consider before you invest.

What is growth investing?

This investment style focuses on buying stock from new and emerging companies with significant growth potential. These companies are often on the small side and may not have a long history of earnings to provide estimations of future growth.

The benefit of investing in newer companies is that if they succeed, they may increase their earnings at a rate that outpaces the market, making it possible that stocks purchased early will experience an enormous increase in value over time.

It may be useful to contrast growth investing with value investing, which takes the opposite approach. With value investing, investors look for companies with a long history of growth whose stock is trading at an amount they feel is too low. In other words, they buy stocks that they feel the market is undervaluing.

The other key difference between growth investing and value investing is that growth investing is the riskier option of the two. Since most of the companies you’ll invest in with a growth strategy are smaller and have a shorter history than other companies, there is a risk that a company will not meet strong growth projections and may even fail.

5 factors in growth investing

There are five key factors that growth investors look for when choosing a value stock to buy:

  • The company’s historical earnings
  • The company’s potential future earnings
  • The company’s profit margins
  • The return on equity (ROE)
  • Share price performance

If you decide to adopt a growth investing strategy, it’s essential to research each company you invest in, both to maximize the growth potential of your investments and to mitigate your risk.

What are examples of growth investing?

There are several investment categories that may fall under the umbrella of growth investing. You may want to consider any or all of these as you build a growth investment portfolio.

Small-cap stocks

The term ‘cap’ refers to the market capitalization or net worth of a stock, and stocks are typically divided into micro, small, mid, and large-cap categories. Small-cap stocks are stocks in companies that have between $300 million and $2 billion in market capitalization.

Small-cap stocks have greater growth potential than large-cap or blue chip stocks, but they also come with greater risk. Historically, small-cap stocks have outperformed stocks from large companies after a recession.

Healthcare & technology stocks

Healthcare and technology stocks fit nicely into a growth investment strategy because both industries have the potential to introduce revolutionary products that give them high growth potential.

One of the most impressive examples of growth potential is Apple. When Apple stock first became available to the public, it was selling for an average of $0.0845 per share. In 2022, Apple stock sold for an average price of $154.15 per share.

Dividend growth investing

You can earn some money in the short term with growth investing if you choose dividend stocks from companies with growth potential.

Dividends are payments made to shareholders, often on a quarterly basis. Your earnings may be low at first but each time you collect a dividend payment, you’ll be earning income on your investment. You may choose to reinvest your dividends or cash them out.

Speculative investments

The growth investing category with the highest risk is speculative investments. Here are some examples of specific investments that fall into this category:

  • Penny stocks
  • Futures
  • Options contracts
  • Foreign currency
  • Speculative real estate/undeveloped land
  • Oil and gas drilling partnerships
  • Private equity

The thing to be aware of before undertaking any speculative investment is the high degree of risk. Most of the people who engage in speculative stock investing are high-income people who can afford to lose everything they invest.

What is a Growth Investing Strategy? & 7 Pros & Cons (1)

7 pros and cons of growth investing

Now, let’s review seven pros and cons of choosing a growth investing strategy.

Pros of growth investing

Here are some of the advantages of choosing a growth investing strategy.

#1: High returns

The first advantage of growth investing is that you’ll have the chance of earning an extremely high return on your investment. We already talked about Apple as an example of an investment that has earned high returns over time. Other tech companies have had similar success, including Amazon and IBM.

A small investment now could lead to big earnings later if you hold your stock and you’re willing to ride out market fluctuations. It’s important to note that growth investments should be viewed as a long-term investment strategy.

#2: Growth potential

Growth potential and earnings go hand in hand. When compared to value investments, growth investments have far more room to grow. When blue chip investments usually return a small but reliable return on investment, growth stocks have the potential to do far more.

Anybody who doesn’t mind taking a bit of a risk can benefit from the long-term potential of growth investments.

#3: Invest in new/growing companies

If you’re someone who enjoys the idea of supporting new and growing companies, then using a growth investment strategy may be right for you.

You’ll need to do some research to be sure you understand each investment before you make it, but growth investing makes it possible to support companies whose products and/or mission you believe in while providing the opportunity to grow your investment at the same time.

#4: You can get stock at bargain prices

Finally, you can buy growth stocks at prices that are often far lower than what you would expect to pay for high-cap or blue chip stocks, meaning that you’ll own a bigger stake in the companies you invest in.

As you might expect, owning more shares also leads to greater earning potential, so that’s something to keep in mind as you choose your investments.

Cons of growth investing

Now, let’s look at the cons of growth investing, which are important to consider before you put any of your earnings into these investments.

#5: Growth investing comes with high risk

Arguably the biggest downside of growth investing is that it carries with it a significantly higher risk than value investing. With value investing, you can rely on a stock’s history to help you understand how much of a return you’ll get on your investment. That may not be the case with growth investing.

A small-cap company or a company in a high-growth sector such as healthcare or technology may have the potential for high or even exponential growth. However, there’s no guarantee that the investments you choose will experience significant growth. They may come with far slower growth than you anticipated or no growth at all, and either way, you’ll need to be prepared for that.

#6: You may not earn anything

There is a wide range of growth investments to choose from, but all of them carry some degree of risk. There’s a risk that you may not earn anything on your investments and almost certainly won’t earn much in the short term.

You’ll need to keep the long-term prospects of any growth investment you choose. Remember, you’ll be investing in the potential of a company, not its current value. People are most likely to lose money when they pull out of their investments too quickly.

#7: You could lose your investment

The biggest of all the risks associated with growth investing is that you might lose your entire investment if a company fails. That’s why most speculative investments are reserved for high-income investors who can afford to take a hit.

It’s for this reason that we recommend choosing growth investments wisely and balancing them with other investments to make sure you’re not taking more risk than you can bear.

Tips for growth investing

Here are a few tips to keep in mind if you decide you want to pursue a growth investment strategy:

  • Research your investments. We can’t overstate the importance of looking at a company’s stock and earnings history before you invest. While research won’t eliminate your risk, it will help you choose between acceptable risks and unacceptable ones.
  • Honor your tolerance for risk. Some people are more comfortable taking risks than others. As you ponder your investment strategy, make sure to consider how much risk you want to take and how much you’re prepared to lose before you buy any stock.
  • Diversify your investments. Risk diversification is a must in any portfolio. As a rule, you shouldn’t have more than 10% of your portfolio in any one investment. You should also balance high-risk, medium-risk and low-risk investments as a way of avoiding large losses that could decimate your earnings.
  • Take a long-term approach. Finally, take a long-term view of investments in the stock market. Remember that the overall trend of the stock market is up and when big corrections occur, you’re likely to be better off if you hold onto your stocks rather than selling them at a loss.

Using these tips, you can begin to build a stock portfolio that uses a growth investing strategy to maximize your earnings.

Build your growth investing portfolio

Growth investing is a good long-term strategy if you want to maximize your earnings and you don’t mind taking some risks with your investments. The seven pros and cons we’ve listed here can help you decide whether growth investing is right for you.

Do you need some advice about building your investment portfolio? Addition Financial is here to help! Click here to learn about our Financial Services and book an appointment with one of our Financial Professionals from LPL Financial.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.

As a seasoned financial expert with a background in investment strategies, let me dive into the concepts presented in the article and provide additional insights.

The article discusses the importance of understanding investment strategies, particularly focusing on growth investing. Here's a breakdown of the key concepts covered:

Growth Investing Strategy:

Definition:

  • Growth Investing: This strategy involves investing in stocks of new and emerging companies with substantial growth potential. These companies are typically smaller and may lack a long history of earnings.

Comparisons:

  • Value Investing: Contrasted with growth investing, value investing seeks companies with a long history of growth but undervalued stocks. It relies on the belief that the market is underestimating the company's true worth.

Factors in Growth Investing:

  1. Company Analysis:

    • Historical Earnings: Examining the company's past earnings.
    • Potential Future Earnings: Assessing the company's growth potential.
    • Profit Margins: Analyzing the company's profitability.
    • Return on Equity (ROE): Evaluating the company's efficiency in generating returns.
    • Share Price Performance: Monitoring the stock's historical performance.
  2. Research Importance:

    • Emphasizes the need for thorough research to maximize growth potential and mitigate risks.

Examples of Growth Investing Categories:

  1. Small-Cap Stocks:

    • Defined by market capitalization, with smaller companies having higher growth potential but also increased risk.
  2. Healthcare & Technology Stocks:

    • Industries with potential for revolutionary products and high growth.
  3. Dividend Growth Investing:

    • Combines growth potential with earning income through dividends.
  4. Speculative Investments:

    • High-risk category, including penny stocks, futures, options, foreign currency, speculative real estate, oil and gas drilling partnerships, and private equity.

Pros of Growth Investing:

  1. High Returns:

    • Highlights the potential for significant returns over the long term using examples like Apple, Amazon, and IBM.
  2. Growth Potential:

    • Stresses the greater growth potential compared to value investments.
  3. Support for New Companies:

    • Allows investors to support new and growing companies aligning with their beliefs.
  4. Buying Stocks at Bargain Prices:

    • Offers the opportunity to purchase growth stocks at lower prices, leading to larger stakes in companies.

Cons of Growth Investing:

  1. High Risk:

    • Acknowledges the increased risk associated with growth investing, especially in smaller or high-growth companies.
  2. Possibility of No Short-Term Earnings:

    • Warns that returns may be low in the short term, and investors should focus on the long-term potential.
  3. Risk of Losing Investment:

    • Emphasizes the potential loss of the entire investment, particularly in speculative investments.

Tips for Growth Investing:

  1. Research:

    • Underscores the importance of researching a company's stock and earnings history before investing.
  2. Risk Tolerance:

    • Advises considering personal risk tolerance before making investment decisions.
  3. Diversification:

    • Recommends diversifying investments to manage risk, avoiding large losses in any one investment.
  4. Long-Term Approach:

    • Encourages a long-term perspective, aligning with the overall upward trend of the stock market.

Closing Statement:

The article concludes by emphasizing the suitability of growth investing for those willing to take risks for long-term earnings. It also recommends seeking professional advice for building an investment portfolio and highlights the importance of legal, tax, and financial consultation tailored to individual needs.

For personalized advice and assistance in building your investment portfolio, the article suggests consulting with Addition Financial's Financial Professionals from LPL Financial.

What is a Growth Investing Strategy? & 7 Pros & Cons (2024)

FAQs

What is a growth investment strategy? ›

Growth investing is the strategy where the prime focus is to increase the investor's capital. In this strategy, the money is placed on stocks of small and new companies whose earnings are expected to grow at a certain level.

What are the cons of growth investing? ›

Investment in growth stocks can be risky. Because they typically do not offer dividends, the only opportunity an investor has to earn money on their investment is when they eventually sell their shares. If the company does not do well, investors take a loss on the stock when it's time to sell.

What are 7 strategies you can use in making a wise investment? ›

  • Investing 101. There's no one-size-fits-all investment portfolio or retirement strategy, but there are overarching goals that smart investment plans gravitate around: ...
  • Value Investing. ...
  • Growth Investing. ...
  • Momentum Investing. ...
  • Dollar-Cost Averaging. ...
  • Buy and Hold Strategy. ...
  • Diversification. ...
  • Modern Portfolio Theory (MPT)

What are the pros and cons of investing? ›

Bottom Line. Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

What is growth strategy with example? ›

A growth strategy is a plan that companies make to expand their business in a specific aspect, such as yearly revenue, number of customers, or number of products. Specific growth strategies can include adding new locations, investing in customer acquisition, or expanding a product line.

What are the advantages of growth investment strategy? ›

The primary advantages of growth investing include higher potential returns, capital appreciation, and better long-term prospects. Growth investors target companies with innovative products or services and strong market positions, which can result in significant capital gains over time.

What are the pros and cons of growth stocks? ›

Growth stocks vs. value stocks
Value StockGrowth Stock
May pay dividendsDon't usually pay dividends
Undervalued or reasonably valuedHigh-priced
Less volatileRiskier
Larger, more established companiesCompanies offering more unique products and growth
1 more row
Jan 12, 2023

What are 5 cons of investing? ›

While there are some great reasons to invest in the stock market, there are also some downsides to consider before you get started.
  • Risk of Loss. There's no guarantee you'll earn a positive return in the stock market. ...
  • The Allure of Big Returns Can Be Tempting. ...
  • Gains Are Taxed. ...
  • It Can Be Hard to Cut Your Losses.
Aug 30, 2023

Is growth investing high risk? ›

Investing in growth companies carries a moderate to high level of risk. Stock prices for growth companies are often high compared to the company's value. Yet, investors are often willing to pay these higher prices, even when the company is overvalued, because they believe the company has high growth potential.

What is the number one strategy of investing? ›

Taking a buy-and-hold approach to investing is both the simplest and most dependable way to achieve substantial portfolio returns.

What is the most successful investment strategy? ›

Buy and hold

A buy-and-hold strategy is a classic that's proven itself over and over. With this strategy you do exactly what the name suggests: you buy an investment and then hold it indefinitely. Ideally, you'll never sell the investment, but you should look to own it for at least three to five years.

What is the simplest investment strategy? ›

Buy and Hold

Buying and holding investments is perhaps the simplest strategy for achieving growth. If you have a long time to invest before needing your money, it can also be one of the most effective.

What is the biggest problem with investing? ›

Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.

Is it better to keep money in bank or invest? ›

Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run. Here are just a few of the benefits that investing your cash comes with: Investing products such as stocks can have much higher returns than savings accounts and CDs.

Is there any disadvantage to investing? ›

Disadvantages of investing in stocks Stocks have some distinct disadvantages of which individual investors should be aware: Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies' policies, which individual investors do not influence.

What is an example of a growth investment? ›

High-growth industries: Growth investors tend to invest in companies that operate in industries that are expected to grow faster than others. Technology and healthcare are two examples of industries that are expected to grow faster than average. Growth stocks typically have high valuations.

What are the strategies 4 growth? ›

In the paper, he describes four means of growing an organization that corresponds to the four quadrants of a product-market matrix. The four strategies Ansoff identifies are market penetration, product development, market development, and diversification.

How do growth strategies work? ›

Growth strategies work by aligning a marketing team with long-term goals, then forming an action plan on how to achieve those goals. A growth strategy requires that all departments within an organization involved, are focused on growing the company from many different angles, and fully encompasses a marketing strategy.

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