Growth

Lesson

In this lesson, we will discuss the growth investing style, which focuses on investing in companies with high potential for growth in earnings, revenues, and stock prices. Growth investors seek to capitalize on the increasing value of these companies over time, often prioritizing capital appreciation over dividend income.

Practice Question #1

Which of the following best describes growth investing?

A) Focusing on companies with high dividend yields

B) Focusing on companies with high potential for growth in earnings, revenues, and stock prices

C) Focusing on companies with low valuation ratios

D) Focusing on companies with a history of paying consistent dividends

Select an option above to see an explanation here.

A) This describes dividend investing. B) This is the correct definition of growth investing. C) This describes value investing. D) This describes dividend investing.

Terms

Growth investing:: An investment style that focuses on companies with high potential for growth in earnings, revenues, and stock prices.

Practice Question #2

Which valuation ratio is most commonly associated with growth investing?

A) Price-to-earnings ratio (P/E)

B) Dividend yield

C) Price-to-book ratio (P/B)

D) Price-to-sales ratio (P/S)

Select an option above to see an explanation here.

A) The P/E ratio is commonly used in growth investing to evaluate a company's growth potential relative to its stock price. B) Dividend yield is more commonly associated with dividend or income investing. C) The P/B ratio is more commonly associated with value investing. D) The P/S ratio can be used in growth investing but is not as commonly associated with this style as the P/E ratio.

Do Not Confuse With

Value investing:: An investment style focusing on undervalued companies with strong fundamentals, often prioritizing dividend income over capital appreciation.

Practice Question #3

Which of the following is a key difference between growth investing and value investing?

A) Growth investing focuses on capital appreciation, while value investing focuses on dividend income.

B) Growth investing focuses on companies with low valuation ratios, while value investing focuses on companies with high valuation ratios.

C) Growth investing focuses on companies with a history of paying consistent dividends, while value investing focuses on companies with high potential for growth in earnings, revenues, and stock prices.

D) Growth investing focuses on generating regular income from investments, while value investing focuses on capital appreciation.

Select an option above to see an explanation here.

A) This is the correct key difference between growth and value investing. B) This statement is incorrect; growth investing focuses on companies with high growth potential, which often have high valuation ratios, while value investing focuses on companies with low valuation ratios. C) This statement is incorrect; growth investing focuses on companies with high growth potential, while value investing focuses on companies with a history of paying consistent dividends. D) This statement is incorrect; growth investing focuses on capital appreciation, while income investing focuses on generating regular income from investments.

Real-World Example

A growth investor might invest in a company like Tesla, which has experienced rapid revenue and earnings growth in recent years due to increasing demand for electric vehicles. Despite its high valuation ratios, such as P/E and P/S, a growth investor may believe that the company's growth potential justifies the higher stock price.