Key Features of Growth Stocks
Growth stocks refer to shares in a company, or an organization, which are expected to grow at a significant rate above the average market's growth rate.
Growth stocks refer to shares in a company, or an organization, which are expected to grow at a significant rate above the average market's growth rate.
Growth stocks typically do not pay dividends. This is because the companies issuing growth stocks usually seek to reinvest accrued earnings to boost growth during the short-term.
Growth stock investors invest because they expect to earn money through capital gains from eventually selling their shares in the future. Growth stocks appear expensive as they are traded at a high P/E ratio, but these valuations could turn out cheap if the company's rapid growth increases and the shares prices are driven up.
Growth stock investment could be a risky business because they do not offer dividends. Investors put in such a high amount for the stocks, solely depending on their expectation for the company's growth.
They only hope they’re able to earn money from their capital gains, but if the expected growth does not happen, investors are likely to lose out on the stocks when it’s time to sell.
Features of Growth Stocks
Growth stocks are usually identifiable by their features. Some of these features include;
High Growth Rate
Just as the name implies, growth stocks exhibit higher growth rates than the average market's rate. The stocks grow faster than an average stock in the market. This causes the stocks to have a higher price when compared to other stocks.
Risk Factor
Growth investments usually possess higher risks than other investments. Since the stocks are being purchased in anticipation of growth, it could result in losses if the expected growth does not occur.
Unique Product Lines
Growth companies usually have unique product lines. They typically possess some form of advantage over other competitors, such as access to technologies, and patents, which puts them ahead of other competitors in the industry.
Growth companies thrive on innovation as the main factor which fosters their growth.
Low Dividends
Growth stocks either pay extremely low dividends, or none at all. Since the companies reinvest their earnings, there’s hardly a way for dividends.
Growth stocks are sometimes confused with value stocks, but they are in no way synonymous. While investors in growth stocks expect to earn from the capital gains due to an anticipated rapid company growth, value investors invest in undervalued stocks, hoping to eventually gain from them.
Growth stocks appear to be overvalued and are usually traded at a high price to earning (P/E) ratio, while value stocks are traded at a low price to earning (P/E) ratio.
Some investors choose to diversify their investments by including both growth and value stocks in their portfolios, while others may choose to focus on either value or growth stocks.
Irrespective of the method employed by investors, critical analysis of the stocks remain important for every investment.