In most circles, it refers to buying into companies (through equities, partnerships, etc.) that show signs of "above average growth".
At first glance, this looks good; a company that is growing quickly should have a rising share price, and be a good place to park your money.
But what is above-average growth? Is it number of employees, square footage, number of products, profits? And what data is used to calculate the average?
Now let's put it all back together: growth investing is the decision-making process you use to buy shares in companies with above-average growth in their financial metrics.
Here are a few examples of "above-average growth":
The words in quotations are meant to call your attention to the fact that even these criteria are subjective; "substantial and sustainable" can vary from industry to industry, market to market.
You can find this information in many places, so feel free to use whatever source is easiest for you. For starters, try Finviz.com.
Instead of the stocks you hear about on CNBC, watch the action of the market leaders you discover, as they often lead the general markets higher and lower.
In order to be considered a candidate for your watch list:
1) The current quarter's earnings should show a major increase over last years earnings in the same quarter (>20%).
2) The current quarter's earnings should be higher than the previous quarter's earnings, for the past 10 quarters (accelerating).
3) Annual earnings per share should be growing year over year for the last 5 years (>25% increases) If you're calculating after-tax profit by hand, watch out for "nonrecurring earnings". Nonrecurring earnings are not counted towards EPS because they are one time events (such as the sale of land).
Increasing institutional ownership means more awareness of a stock by the large players. Since you and I are not market makers, our biggest gains come when large players initiate and add to their positions.
The general market has a HUGE impact on the price performance of stocks. If you're not disciplined, it can have an equally huge impact on the performance of your investing strategy.
Study the market indexes every day for price and volume changes to figure out what the trend (uptrend, flat, downtrend).
A general rule of thumb is that 3/4 of all stocks will rise and fall with the general market.
But since we're looking for high growth companies, we need to be extra vigilant with our trading rules. These high performance stocks usually move 2-3x the market change. So if the market is falls 1%, your growth stocks will be down 2% to 3%.
This illustrates another reason why cutting your loses is so important. A 5% correction market prices could result in a 10%-15% loss in the value of your stock!
Think of these criteria as a way to increase your odds of success, with the knowledge that you still need a plan of attack, to practice sound trading money management, position sizing, and diversification.
If you're interested in learning more about the relationship between price and volume, or how to find and trade the best stocks for your growth strategy, check out this book on Amazon via the following affiliate link:
It's one of my favorites.