When it comes to financial trading, there are now more markets, assets and investment vehicles available than ever before.
While this has created immense opportunity for investors, it has also made it harder to determine which one is best suited to your philosophy and core trading objectives.
Take growth investment, for example, which is a relatively new trading vehicle and one that is not suited to everyone. Below, we’ll analyse this in further detail and offer a brief guide into the key considerations.
1. Understand the Basics of Growth Investment
In simple terms, growth investment strategies target company stocks whose earnings are expected to grow at an above-average rate in comparison to the marketplace.
On occasions, these stocks may be priced higher than their intrinsic value, but investors will still trade them in the belief that they will deliver incremental returns over time.
In this respect, growth investment strategists tend to have a healthy appetite for risk, as they’re willing to spend considerable amounts on stock without any guarantee that they’ll continue along a forecast growth path.
2. Identify the Key Metrics for Growth Investments
The next step is to target individual stocks that are capable of delivering growth, and this is arguably the most challenging part of the process as there’s fixed criteria for evaluating companies.
Fortunately, there are some metrics that can be used to help inform your decision and build a robust portfolio. Historical earnings growth is one of the most widely used, as this helps you to identify companies that have a history of expansion and a proven ability to succeed over time. Similarly, company profit margins are a crucial metric, as they highlight each business’ likely growth potential in the future.
The key is to consider these metrics in the context of a business’ real-time performance, while also appraising their published growth plans and the industry that they operate in.
3. Remember the Principles of Value Investing
This type of investing sits at the polar end of the spectrum to value investment, through which individuals target underestimated stocks that are trading far below their intrinsic value. This is one of the more simplistic investment propositions in the UK, and one that appeals to novice and inexperienced traders.
Even as a growth investor, you should keep the principles of value investing in your mind over time. After all, the goal is to identify stocks that can deliver a viable return within a predetermined period of time, regardless of their starting price or the surrounding market competitions.
So, when appraising high priced stocks and their future growth potential, try to keep value and your bottom line return in mind at all times.