Growth Investing

Intermediate

Growth investing is an investment strategy focused on buying shares of companies expected to grow their revenues and earnings faster than average, even if their shares look expensive by traditional measures.

Growth investors are willing to pay high prices relative to current earnings because they expect strong future growth to justify the valuation. They look for companies with expanding markets, innovative products, competitive advantages and strong management.

Typical growth investments include companies in technology, healthcare and consumer sectors that are gaining market share quickly. Many reinvest most of their profits, so they pay little or no dividends.

For example, a growth investor might buy shares in a software company trading at 60 times earnings because its revenue is growing 35% a year and it is expected to dominate a large market.

Growth investing can deliver exceptional returns when investors correctly identify companies that sustain rapid growth for many years. But it carries significant risks. High valuations leave little room for disappointment, so if growth slows, share prices can fall sharply. Growth stocks are also often more sensitive to rising interest rates.

Growth investing is often contrasted with value investing. Historically, each style has outperformed the other for long periods, and many investors hold a mix of both.

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