Investing in growth shares has been a sound means of generating high returns for many years. Such companies offer the potential for strong profit growth that has often translated into a rising share price.
Of course, unearthing the best growth opportunities to buy now may be a tough task. The world economy faces a challenging future, but one that could be filled with opportunity.
By focusing on sectors with long-term growth appeal, and companies that have large competitive advantages, it is possible to earn 100%+ returns from an initial investment in the coming years.
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Doubling an investment in shares
While doubling the value of an investment in growth shares may sound unlikely at first glance, the stock market's track record shows that it could be very achievable. For example, indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have delivered annualised total returns that are in the high-single digits in recent decades. Assuming a similar return in future would mean that an investment in the stock market that tracks the wider index could double in value within a decade.
Of course, buying companies with strong growth characteristics may help to generate higher returns than the stock market. Investors who buy such companies at fair prices may enjoy impressive returns that provide them with a significantly improved financial outlook.
Unearthing the best growth shares
Finding companies that can deliver higher growth rates than the wider stock market is a challenging task at the present time due to the uncertain economic outlook. However, by focusing on industries benefitting from growth trends, it is possible to unearth attractive growth stocks. For example, sectors such as healthcare and online retail could benefit from long-term trends such as an ageing global population and a shift in consumption from in-store to online.
Within appealing growth sectors, it could be a good idea to focus on companies that have a clear competitive advantage versus their peers. For example, they may have a unique product that can provide them with higher margins and a more resilient sales profile in the coming years. Similarly, businesses with strong brand loyalty may become more dominant in growth industries. This may lead to a rising market share and higher profitability.
Building a portfolio of stocks
As ever, diversification is crucial when building a portfolio of growth shares. Some businesses will inevitably fail to live up to expectations. Therefore, it is important to have a wide spread of holdings to limit the impact of a small number of failures on a wider portfolio.
Furthermore, buying stocks with appealing growth prospects when they trade at a fair price could be crucial to doubling an initial investment. Even if a stock has an attractive growth outlook, there should also be a margin of safety so there is scope for capital growth to match its rising bottom line.
