What is growth investing?

Growth investing is an investment strategy where, compared with lower-risk strategies, we would expect greater returns given that it involves taking on additional risks. More specifically, it involves investing in growth shares, in other words young companies whose profits are expected to increase at an above-average rate compared with their sector or the market as a whole. Growth investing is potentially very appealing to many investors seeing as buying shares in up-and-coming companies can lead to impressive returns, provided the companies are actually successful. Seeing as very few of these companies are tried and tested, growth investing is often associated with a greater risk. This is because you as an investor have no guarantee that the company will obtain sufficient debt capital, that it will reach the break-even point, that its business model will be a success on the market, or that it will be able to bear the financing costs. The opposite strategy to growth investing is value investing. Value-oriented investments are investments that appear undervalued, and tend to be in little demand. Investors who pursue a value investing strategy are often drawn to these investments based on the assumption that the market will recognize their value over time, meaning their price will increase. A person who opts for this investment strategy will select shares that appear undervalued on the stock exchange.

What examples are there of growth shares?

Seeing as growth potential is the key criterion when it comes to growth investing, investors focus in particular on small, young companies in booming markets that are developing promising products or technologies, meaning they forecast high growth rates. It isn’t uncommon for these to be companies that have only recently gone public, or companies for which an IPO is imminent. Investors make investments by buying shares in these companies (e.g. through a fund) either directly or indirectly. Typical issuers of these sorts of growth shares are companies in the hi-tech, biotech, medtech or the telecommunications and media sector.

Are growth funds safer than growth shares?

Investors who would prefer to invest in an industry or a certain area instead of individual companies can opt for growth funds. The main advantage here is that fund managers – depending on the arrangement set out in the fund contract or prospectus – take over the research and management. For instance, they incorporate companies with potential into the fund, and they sell units to companies with negative prospects. This means you aren’t necessarily making a lower-risk investment seeing as the fund management bases its investment decision on expectations that no-one can guarantee will be met. Investors do at least benefit from diversification, meaning the risks they run tend to be lower than with a single share.

What makes growth investing appealing?

Growth investing is primarily based on the speculation of generating above-average profit when growth shares are sold in the future. For this scenario to occur, the share must undergo a significant increase in value from time of purchase to time of sale. This means that, unlike with the dividend strategy (for instance), you can expect poor or even no dividends whatsoever from growth investing. The reason being that these companies generally re-invest all their profits to finance their continued growth. If your expectations are met, you will often be able to get a better return with the capital you’ve invested than if you had gone with the value investing strategy.

What makes growth investing risky?

Unlike with value-oriented investments, investors don’t look at previous performance and development when it comes to growth-oriented investments, but rather they speculate about their future performance and development. But because it’s not possible to accurately predict the future even with growth investing, despite all indicators, growth shares tend to be riskier than value-oriented shares. This is especially true if a company is yet to establish itself on the market – whether due to a lack of resources, wrong decisions or other reasons – and if growth expectations are not met. Whether investors make a profit with growth investing or not comes down to the sale. This is why you should carefully consider the companies you are investing in and their (market) environment, and not just before buying your growth shares, but on an ongoing basis. But sales aren’t the only way to make a profit. In some circumstances, it may be worth waiting. Shares in tech companies such as Microsoft and Apple were once considered growth shares, and now pay dividends.

How do I recognize the growth potential of a company?

For one thing, when you are assessing the growth potential of a company, your own personal estimations come into play, as do expectations of a technology, products or the company. For another, there are tried-and-tested methods and criteria you can draw on to get the most objective information possible before making a growth investment. We’ve outlined a few here:

Despite all the tools, the growth strategy is and remains something for bold investors with a high risk appetite and capacity. Ideally, they should also have a long investment horizon. Seeing as their investment strategy lays the foundation for investments, it is especially important to set out the strategy as early on as possible and to stick to it, particularly if there are corrections on the stock markets.