Self-directed investors who focus on growth are looking for publicly traded companies that are expected to grow strongly in the coming years. By focusing on growth stocks, investors are trying to find companies that can generate significant returns over the long term.
It is an investment strategy that involves investing in companies and anticipating a growth rate well above the average of their industry or the overall market. The main goal when investing in growth stocks is to realize considerable capital gains by reselling shares at a higher price than the initial purchase price. Investors who follow the growth investing approach are not interested in quarterly dividend payments. Also, the vast majority of companies in the growth phase prefer to reinvest their earnings instead of redistributing them to their shareholders.
Unlike value investors, it’s not about identifying bargain companies by looking for stocks that seem undervalued relative to their intrinsic value. This approach differs significantly from the growth investment strategy.
There are a few aspects to consider when looking for a publicly traded company that could offer attractive growth potential.
You need to make sure that the leaders are the most qualified candidates for the company to be successful and continue to show strong growth over the long term. Some examples of questions to ask yourself: Is the president the founder of the company? Have leaders already proven themselves with other projects in the past? Are members of management major shareholders?
The aim is to identify whether the company has a competitive edge that can protect it from its competitors in a sustainable way. You need to understand how the company stands out from its rivals and what would make the company have better customer retention or profitability.
You also need to know who all the customers targeted by the company are, so you know what the target market is for the company’s products/services. That way, you can determine what the factors are that are currently influencing this market and try to predict other factors that could hold back growth in the future.
If you’re planning to use a growth approach to invest, you will also need to analyze the company’s financial results to determine if this is an attractive opportunity for this type of strategy. To appropriately analyze growth stocks, here are some important things to consider:
In conclusion, it’s important to understand that growth-oriented investing is an approach that can be very profitable provided that the companies in which you have invested are as successful as you had anticipated. This strategy does have a certain amount of risk related to uncertainty about the future of growth companies that have not yet reached a certain level of maturity and financial stability. Ultimately, it’s essential to do your research to fully understand the companies you plan to invest in and try to assess their long-term potential as best as possible.
Alexandre Demers has been an active investor since 2013 and is the founder and president of Traders 360 Inc. He has also authored the e-book “Investir à contre-courant” (Investing against the grain) and hosts the “Finance 360” podcast available free on Spotify and Apple Podcast. His goal is to make stock trading more democratic and educate the public at large about the possibilities of self-managed investments.
For more details, go to www.traders360.ca
The above article was written by Traders 360, an independent external firm partnered with National Bank Direct Brokerage.
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