What is growth investing?

Classroom

oi-Roshni

By Roshni Agarwal

Published: Monday, February 17, 2014, 14:01 [IST]

Among the different investment styles or strategies followed by the fund managers growth investing and value investing are the most common. Based on the 2 strategies, managers as well as investors pick up the stock in the portfolio. While value investing is based on the assumption that stocks are currently trading at a lower value than their underlying fundamental value, the idea behind growth investing is different.

So what are the factors emphasized upon while going by growth investing

Growth investing without giving much weightage to the current market price of the stock focuses on the earning potential of the company. And unlike value investment or value buying, an investor can end up buying stocks that are trading at a higher value in comparison to the fundamental value. At such stocks trading at a higher valuation have high price-to-earnings multiple (P/E) and price-to-book value ratio (P/B). And even the small amount of slippage in respect of earnings results in substantial correction in stock price.

So, the stocks with high P/E that carry a high risk are even put to bet by growth investors if the earning potential is in line with the high P/E. Read more about P/E and its importance.

Generally, stocks selected going by growth investing provide low dividend yields, show high fluctuations based on interest rate changes, volatility and correspondingly lower downside protection.

Any of the stock that shows immense potential for growth in terms of earning or any new industry in its nascent stage or any company that has a competitive advantage in respect of either geography or region are often included in the portfolio when following growth-based investment strategy. Nonetheless, though industry fundamentals have an impact on the stock in the sector, an individual's company performance as well earning potential has to be continuously tracked for consistent high returns.

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