There are various kinds of investment strategies followed by different investors.
Each strategy is underlined by the same principle of earning returns on the stocks invested in.
One such strategy is growth investing.
In growth investing, investors choose stocks of those companies that show the signs of having an above-average growth.
These stocks are characterized by high price-to-earning (P/E) or price-to-book ratios.
The concept of "growth stock" may differ from investor to investor.
However, the fundamental definition is that these stocks exhibit such profits that are over the market average over a long period.
This would mean investing in stocks of very giant corporations.
Some of the investment vehicles that can accommodate growth stocks are as follows: oRecovery shares oEmerging markets oBlue chip corporations oTechnology and Internet shares oSmaller companies with a huge potential for growth oSecond-hand life policies, and more In contrast to other types of investors such as value investors, growth investors are interested in earnings growth of the stocks.
According to some notable investors, such as Warren Buffett, the basic principle of all these types of investment remains the same - investing in securities with a high "intrinsic value.
" Although growth investors invest in shares with high price, they do not completely ignore factors such as company debt and balance sheet ratios, as these give a clear indication of the intrinsic value of a stock.
Nevertheless, growth investing is fundamentally based on qualitative criteria, such as judgment about the business, its management, its growth potential, etc.
Over time it has been observed that there are some drivers that create growth stocks in a particular period.
One such driver is new technology.
For example, 1930s' and 40s' market was captured by the new technology of motor cars.
Also, the Internet took the stock market by storm in the 90s.
Another driver is the "domination of a niche.
" Some companies dominate the stock market in the particular industry.
These give rise to growth stocks.
However, investors must also keep in mind that even if a certain industry is growing it is not certain that it will give rise to growth stocks.
Moreover, a growing industry will attract new competitors, reducing the niche domination of a particular company.
Growth investing is also very much related to the "competitive advantage" of a stock.
If a company can increase its profitability despite huge competitive pressure, it comprises a true growth stock.
However, investors must take care not to invest in an industry that is too much competitive.
Judgment of true competitive advantage is a challenging task for growth investors.
There are no rules that govern the buying and selling of growth stocks.
An investor should not sell the stock just because a huge profit has been made; however, he should sell it if the factors that led to the investment in the stock no more exist.
The criticism against growth investing has increased after the busting of the "dotcom bubble.
" It has a high risk attached with it as investment is made based on qualitative factors and in the hope of high growth.
This can lead to great losses for investors if the share prices fail to live up to their expectations.