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Growth Investment

Growth Investment

Growth investing is an investment strategy that focuses on businesses that have the greatest potential to grow explosively in both size and importance within their industries. The stocks that growth investors seek often look expensive or over-priced compared to the current revenue and earnings their businesses generate.
Growth investors are attracted to companies that are expected to grow faster (either by revenues or cash flows, and definitely by profits) than the rest. As growth is the priority, companies reinvest earnings in themselves in order to expand, in the form of new workers, equipment, and acquisitions.

The 7 traits of great growth stocks

It's important for growth investors to identify the stocks that have the best chance of becoming tomorrow's blockbusters. But how can you separate the best from the rest? Historically, companies with the following traits have a much better chance of becoming great growth stocks than companies that lack them:
1.A large and expanding market opportunity
2. A durable competitive advantage
3. Financial resilience
4. Repeat-purchase business model
5. Strong past price appreciation
6. Great corporate culture
7. Talented leadership with skin in the game

Financial Resilience

Growth companies that can fund their future growth needs with internally generated cash flows don't have to worry about the health of the financial markets. That's not to say that growth companies have to be profitable from the moment they start operating. Early on, most growth companies invest any available money back into their businesses to accelerate their growth, and that can create short-term losses. Eventually, though, companies that regularly operate at a loss will have to get new capital from investors, and that often hurts returns for those who invested earlier.

Investing in growth stocks

Growth investors have to be willing to take on risk, but the rewards can be great. Many mutual fund investors use growth funds as investment vehicles to get exposure to good growth stocks. Whether you choose to invest in a growth-focused index fund or take the time to individually find stocks with high-growth potential, growth investing can help you reach your long-term financial goals. If growth investing feels too risky for you, consider the value investing approach. Value investing looks more at whether a stock is attractively valued than at its future growth prospects, seeking to find out-of-favor companies that have had their share prices unfairly beaten down.

Growth investments are typically used to:

1. Earn a higher rate of return (but this comes with higher risk).
2. Meet longer term financial goals, five years or more.
Growth investments include shares, property and alternative investments.

Network effects

Network effects apply when a business becomes more valuable when it has more customers, such as with an online marketplace.

High switching costs

High switching costs can dissuade existing customers from moving to a rival service provider, leading to greater retention.

Low-cost producers

Low-cost producers such as Costco Wholesale (NASDAQ:COST) can charge less for their goods and services while still making a profit, giving them flexibility in pricing that higher-cost rivals lack.

Intangible assets

Intangible assets like brand awareness or intellectual property often gain an insurmountable advantage through business reputation or quality that rival products lack.

Growth Investment Vs Defensive Investment

Growth investments are higher risk and offer a higher potential return compared to defensive investments. They aim to give capital growth and some provide income (for example, dividends for shares or rent for property). But, price of growth investments can be volatile over short periods of time.

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