What Are Growth Stocks? All You Need to Know

There are numerous ways for an investor to earn profits from their investments. One such way is through growth stocks. If you are an investor with a high-risk appetite and looking forward to gaining huge returns on your investments, growth stocks may align with your financial goals just right. 

What is a Growth Stock?

Growth stocks are shares of such companies that are expected to show significantly higher growth than the average growth rate in their industry. These are usually companies demonstrating the potential to offer an innovative line of products or services in the near future. 

With their growth-oriented leadership combined with the uniqueness of their product, they have a high chance to tap lucrative market opportunities. If their product hits the mark, the value of their stock rises exponentially, increasing their investment value by manifolds. This is how investors gain such high returns on their investments through growth stocks.

How to Identify Growth Stocks?

Because of such high-risk rates attached to growth stocks, it is very important to first identify a growth stock that is most suitable for you as an investor. Here are some of the steps that can guide you to identify a suitable growth stock:

Step 1: 

To identify growth stocks, it is important to first identify the revolutionary trends around you. Such trends have the potential to make a huge impact on the business world and the lives of people in general in the near future.

To better understand this, let us take an example. Based on the present scenarios, it is safe to say that electric vehicles are likely to change the face of the automobile industry soon.

Step 2: 

Now you need to identify the industries associated with electric vehicles and figure out the companies that are likely to benefit the most from the development of EVs. 

These companies are likely to be such companies planning to introduce electronic vehicles or bring a huge change in this sector. 

Step 3: 

Once you identify the growth stocks, you can choose to invest in them based on your financial plans.

Remember this is just a guide and not an indication to invest in companies associated with electric vehicles. Whenever you invest in the stock market, always use your own judgment and discretion.

Benefits of Investing in Growth Stocks

Here are some advantages of investing in growth stocks: 

• High return: Growth stocks carry the potential to provide very high returns to their investors. These returns on investments are associated with long-term capital gains. However, be mindful that these returns are not guaranteed.
• Suitable for long-term goals: These stocks do not usually yield any return in the immediate future. Therefore, they are more suitable for investors seeking long-term financial gains over those looking forward to making quick profits. 
• Backed by a strong foundation: Growth stocks are only issued by companies that have a promising growth edge to them. These companies are often built on a strong foundation, with highly efficient management and a solid business plan. They operate on solid grounds and therefore have high chances of success.

Drawbacks of Investing in Growth Stocks

Here are some disadvantages of investing in growth-oriented companies: 

• High-risk factor: Even though growth stocks yield very high returns, these returns are not guaranteed. It entirely depends on the performance of the respective companies. So, if the products of these companies fail, the value of the stocks goes down as well. In scenarios like these, the investors are then forced to sell their shares for a very low price.
• No dividends: Growth companies usually do not pay any dividends to their investors because they prefer to reinvest their profits. This helps them appreciate their capital and use the funds for further expansion through aggressive market penetration strategies. So, the only return the investors can expect from growth stocks is when they sell their shares in the future.
• Lack of Clarity on Underlying Growth Factors: There can be various reasons for a company to show signs of growth. Sometimes it is possible that such growth is because of reasons other than their actual product. This can sometimes mislead the investors into seeing it as the growth potential of the company. 

Final Word

Growth stocks are the stocks of companies in their development stage that have a high growth potential. The stocks have a high P/E Ratio (price-to-earnings ratio) and are usually bid at a high price. These are suitable options for investors with a high risk appetite who are seeking high returns on their investments.

Frequently Asked Questions