- Characteristics of Growth Stocks
- Examples of Growth Stocks
- Ways to identify growth stocks
Characteristics of Growth Stocks
1. High growth rate
As their name suggests, growth stocks tend to point out a considerably higher rate than the common market rate. It implies that the stocks grow at a quicker pace than the common stock within the market.
2. Low or zero dividends
Growth stocks sometimes pay either low dividends or zero dividends the least bit. it’s as a result of growth firms are growing at a really quick pace, and therefore usually need to reinvest their preserved earnings back into the corporate to spice up the revenue-generating capability of the business.
3. Competitive advantage
Growth firms sometimes demonstrate a considerably higher rate as a result of their incline to possess some quite competitive advantage over alternative firms within the same trade. The competitive advantage provides growth firms a novel marketing proposition (USP) that helps them sell and grow higher than alternative firms at intervals of a similar trade.
4. Loyal consumer base
Since growth firms relish a competitive advantage over alternative firms at intervals in the trade, they incline to relish a loyal, growing client base. The USP that such firms relish over their competitors ensures a perpetually growing client base, which contributes to their increasing rate.
Since growth stocks pay either terribly low or zero dividends, investors don’t create abundant out of their investments within the short term. However, the long-run outlook is completely different. Investors are ready to generate substantial revenues through capital gains, once seeing growth firms’ expertise two-fold, three-fold, or multi-fold growth over the years.
6. Risk issue
Investments perpetually go along with some quantity of risk. Such a truth isn’t conjointly foreign to growth stocks. Whereas growth stocks are an enticing investment choice and may generate substantial profits within the long run, the extent of uncertainty closing them within the short term contributes to a high-risk issue.
Such uncertainty arises from the very fact that growth stocks sometimes pay low or no dividends. Hence, the capitalist solely profits from the investment in the long run, provided the corporate performs well. In the rare case that the corporate fails to perform, the capitalist could incur losses. Hence, like each investment, there’s a risk issue connected to growth stocks.
Examples of Growth Stocks
1. Amazon.com Inc. (AMZN)
Amazon is taken into account one of all the best-performing, roaring growth stocks over the years mutually will tell from the enormous online retailer’s large and continued success over the years.
2. Facebook (FB)
Facebook is another growth company that’s been extraordinarily roaring over many years. Whereas once being the foremost in style stock, Facebook suffered its own set of setbacks in recent years concerning knowledge privacy problems, violation of privacy rights, and alternative problems. Despite the various challenges, Facebook remains one of the foremost roaring growth stocks, with an ever-increasing rate.
3. Apple Inc. (AAPL)
Apple is another one of the foremost sought-after growth stocks over the years. Apple’s been ready to deliver the goods at a continual, increasing rate at a really quick pace, primarily thanks to a whole loyal client base. The corporate oversees a whole that customers need to affiliate themselves to – not simply a product, but the whole altogether. Additionally, distinctive and high-quality merchandise and constant innovation provide Apple a competitive edge over its competitors.
4. Netflix (NFLX)
Netflix joins our list of profitable growth stocks. Similar to the said growth firms, the net streaming large started little but operated well in gaining a loyal, growing client base and providing streaming services. Since the corporate was the primary one to supply such services, it enjoyed a competitive edge over alternative market participants, helped by an already established loyal client base. Hence, Netflix was ready to grow as considerably as it did.
Ways to identify growth stocks
Price to earnings ratio
A value to earnings quantitative relation or P/E ratio is employed to determine the worth of the company’s stocks. It’s calculated by dividing the market price of the stock by earnings per share of the stock. That is, P/E ratio = market price per share / Earnings per share
A higher P/E ratio might indicate a growth potential because it shows higher returns on total investments created by the corporate. It shows that the investors believe the upper potential of the corporate and investments within the stock have given the corporate a market price that’s more than its current earnings. In India, growth stocks tend to possess a P/E ratio that’s more than one. Hence, it will be used as an element to spot whether or not a stock will be thought-about a stock.
Price-earnings to growth Ratio (PEG)
P/E ratios come with their limitations particularly once it involves massive firms. In such a scenario, you’ll be able to deem the PEG quantitative relation that takes under consideration the company’s P/E ratio in addition to its expected earnings growth over a particular amount of your time.
PEG growth quantitative relation might provide you with an excellent clearer image of the expansion potential of an organization, particularly in things wherever the P/E ratio is without reasoning high.
PEG quantitative relation is calculated victimization the below equation
PEG quantitative relation = P/E ratio / Earnings per share growth rate