A growth stock is a share in a company that is expected to grow at a rate that is significantly higher than average. When you invest in growth stocks, you invest in a company that has a prosperous future.
What you Should Know about Growth Stocks
- They have a competitive advantage, usually being an innovative product or service that no other company has (at least not to the same extent).
- Their customers are loyal, which drives up stock values.
- They usually don’t pay dividends, instead reinvesting profits into themselves. This means you may not make much money in the short term, but you usually will in the long term.
- They may look expensive now, but in a number of years after the company grows, the price you bought the stock for will look low.
- Their prices are ever changing — when the company does well, stock prices soar, and when they don’t, they plummet.
Growth stocks are different from value stocks, because value stock companies are usually older and well-established. Value stocks are used to describe “hidden gem” stocks that are believed to be worth more than what they’re currently at and are expected to grow in the future. Growth stocks and value stocks are similar in the way that people buy them with the purpose to buy low and sell high. However, value stocks usually present less risk because they belong to companies that are already well-established. However, the return from growth stocks could be much more than returns from value stocks if the company you’re investing in does really well in the future.
How to Spot Growth Stocks
Growth stocks can be hard or easy to spot — sometimes they already have a large following, sometimes they are less well known. It’s difficult to predict what the next “big” company is going to be, there are some things you can watch out for.
- Being aware of industry trends
- Find companies with strong competitive advantages
- Identify niche markets
A few growth stock companies that have progressed tremendously in the last few years include:
Consider what all these companies have in common. They all had strong competitive advantages, dominated their area of business, and were at the forefront of innovation in their field.
In sum, growth stocks are a great way to take advantage of a company’s expansion and success. However, this kind of investing may be long-term, as waiting for the company to reach its full potential is key.