“Investing for growth” refers to putting your money into investment vehicles that will appreciate in value over time and earn you money. Many investment vehicles, like CDs, savings bonds, or even bank savings accounts, will grow in value over time, but really, when people talk about growth investments, they’re talking about investments that will earn you a significant amount of money — much more than the paltry interest payments you’ll get from a CD or other low-risk investment vehicle.
While speculators might take on particularly high-risk investments in an effort to see huge returns, investing for growth doesn’t necessarily mean assuming a large amount of risk. Every investor should allocate some portion of his or her portfolio to growth investments, no matter what stage of life he or she is in.
You can invest in small companies with the hope that they will grow exponentially over five to ten years, making your stock much more valuable, but that’s not the only strategy. Other growth investments include real estate, technology, or health care.
Types of Growth Investments
There are many types of growth investment vehicles, some riskier than others. Penny stocks, undeveloped land, and futures contracts are all some examples of investment vehicles that can lead to astounding growth, but are probably more likely to lead to the loss of all your capital. Developed real estate, small-cap stocks, and health care or technology stocks are some more sensible vehicles for growth investment.
A small-cap stock is stock in a company that has a market-capitalization value of between $300 million and $2 billion. Companies in this category are stable enough that you don’t have to worry too much about losing all your money, but they’re small enough that they still have a lot of potential for growth.
While you’re still going to assume more risk than you would if you invested in a larger, more established company, you’re more likely to be able to earn substantial returns if the company does well and its stocks shoot up in value.
Technology and health care stocks are also considered good growth investments, regardless of whether or not they’re small-cap. That’s because these companies are more likely to offer the kinds of innovations that can make their stock suddenly shoot up in price, even if they’re already established.
Growth Investment Terms You Need to Know
When you’re looking at a potential growth investment, you need to look at three things:
1. Return on equity or ROE
2. Earnings per share or EPS
3. Projected earnings
ROE refers to how much money a company can make with the equity it has from shareholders. A company that turns a larger profit with a smaller amount of equity has a higher ROE and may be a better investment. EPS refers to the amount of money each shareholder earns per share.
If a company is a good investment, its EPS will increase steadily over time, although it’s a good idea to look into the company to make sure that money’s coming from a legitimate source.
Projected earnings are a guess about how well the company will do in the future and can give you some idea of the company’s future growth. Of course, no one can predict the future, but in general, a company’s stock will do well if they consistently release promising earnings projections.
Where to Find Solid Growth Investments
Once you have an idea of the basics of growth investments, you can start looking into making some. Since you want to find an investment vehicle that has some potential for growth but little risk, it’s a good idea to look at a company’s past earnings and financial history before investing. Don’t worry too much about trying to predict a company’s future earnings based on these numbers, however.
Instead, find companies to invest in by identifying trends that you think will become important in the future. For example, if you had, ten years ago, guessed that online shopping would someday be a big deal and invested in Amazon stock, you’d be pretty comfortable today.
To find the right trend, think about the things you’re interested in or know a lot about. If you’re athletic, think about emerging exercise trends; if you care about the environment, think about investing in alternative energy. When you invest in a field that interests you, you’re more equipped to make good decisions, because investing isn’t just about putting money into companies that will grow over time.
It’s also about putting your money into an idea whose time is just around the corner. Identify some promising trends and go with them, but make sure to keep a close eye on your investments; not every company will succeed, no matter how innovative or sound their products.
Investing for growth is tricky, but it’s an important part of growing your wealth over time. The key is to invest in a company that has plenty of potential for growth, so that your stock increases in value significantly over five to 10 years.