Growth Investing as a Teen

As a teen investing in the stock market, our strategy of investing can be different from our grandparents and even our parents. We have more time and compounding potential waiting for us. Unlike our grandparents, we can take more risks. If you are looking for a little more risk with the possibility for above-average returns, then growth investing might be a fitting strategy. 

Growth investing is an investing strategy that focuses on capital appreciation and finding younger companies that are expected to have above-average earnings in the future. This style of investing is like gardening. You find some seeds to plant. You invest time and money into them in hopes they will grow to stand above the other plants in your beautiful garden. 

Starting your own garden does come with risks, especially if you are fostering younger plants. There are a variety of things that can go wrong. The same goes for growth investing. Since these companies do not have a historical track record, their earnings are relatively uncertain and are not guaranteed to perform.

Stocks that may fit into the growth investing strategy are small-cap stocks or sometimes tech companies since they are often priced higher than their earnings value. Small-cap would indicate to an investor that the company is still relatively small but may have the potential to produce superior returns in the future. 

Now, to begin planting seeds to invest in, investors evaluate several factors to determine if a plant has the potential to grow above the rest.

• Historical & Future Earnings Growth is a way to determine if a plant might be one pace to rise above the rest. In stocks, we can use five to ten years of earnings per share data to evaluate the stock’s past performance. Then to gauge future growth, we can be on the lookout for earnings announcements and earnings estimates created by analysts!
• Profit Margin is like gauging if an apple tree is yielding quality apples. If it only produces bad apples, the tree isn’t useful. A stock that has grown sales but incurred too many expenses each year, may not have desirable growth either. 
• Return on Equity (ROE) is a way to find out if the effort and time you are putting into the garden is being returned. If a company’s ROE is low in comparison to the past year, that would indicate that the stockholder's investment is less profitable than in the past.
• Stock Performance is the last important component of identifying a growth stock. A common rule of thumb is that if a company’s stock price can’t double in five years, it may not be considered a growth stock. Although we can’t predict a stock’s future performance, we can use these factors to uncover potential growth stocks to invest in!

And that’s how you begin building a garden using growth investing. Now that we are building some momentum, let’s dive into momentum investing.

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Source: Investopedia | Growth Investing