by Ian Harvey
September 03, 2019
Growth investing, when there is a rallying stock market and a strong economy, which are typically led by the so-called "growth" investments, is a great time for options traders. These are the industries and companies that can -- and do -- grow profits faster than the economy.
Defining Growth Investing and Growth Stocks…..
Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term "growth investing" contrasts with the strategy known as value investing.
Because investors seek to maximize their capital gains, growth investing is also known as a capital growth or a capital appreciation strategy.
And, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.
Why Growth Investing?
Growth investors typically look for investments in rapidly expanding industries (or even entire markets) where new technologies and services are being developed, and look for profits through capital appreciation—that is, the gains they'll achieve when they sell their stock, as opposed to dividends they receive while they own it. In fact, most growth-stock companies reinvest their earnings back into the business, rather than pay a dividend to shareholders. They tend to be small, young companies (or companies that have just started trading publicly) with excellent potential.
Growth stocks are mainly associated these days with tech companies -- particularly in subsectors like the cloud where big things are happening and where money is flowing at a fast clip. Companies in these areas can be reasonably expected to post annual profit growth rates well in excess of 20% in the foreseeable future.
Selecting Companies for Growth Investing…..
Growth investors look at several key factors when selecting companies that may provide capital appreciation. These include…..
Other traits to recognize that are important for companies to undertake when growth investing…..
Growth stocks trade on the stock market exchange and can be found in any industrial sector—but you’ll usually find them in the fastest-growing industries.
Using Growth Stocks for Options Trading
Here, at Stock Options Made Easy, we often use options trades surrounding growth stocks. Obviously the type of strategy we employ is based on whether the stock is performing well or is faltering.
Since growth stocks hinge on valuing performance that is difficult to predict, they tend to be much more volatile than stocks that are backed by more established and predictable businesses. This means that investors seeking big growth should have a tolerance for high volatility. Just because a stock has lost a quarter of its value in a short period of time doesn't mean that it won't rebound to post substantial capital appreciation.