What are growth stocks?

What are growth stocks?

Beginner

1st September, 10:14
Updated: 23rd September, 07:20

Looking to invest in stocks that are likely to grow fast but not sure where to start?

We’ve got you covered when it comes to assessing growth stocks. In this lesson, you’ll learn what growth stocks are, their key characteristics, and where you can get your hands on them. We’ve also compiled a list of some of the top growth stocks you might want to add to your portfolio.

What are growth stocks?

Growth stocks are stocks of companies that grow at a faster rate than other companies in the same industry. That superior growth is measured using factors such as earnings growth and revenue growth. That superior fundamental strength often leads to better than average price gains for these stocks as well. 

Why do investors look for growth stocks?

Companies experiencing exceptional growth tend to reinvest their profits into more growth, rather than using those gains to fund dividends for investors. This makes growth stocks an attractive option for investors looking to land big capital gains over time, rather than aiming for smaller distributions in the form of dividends. Growth stocks are thus viewed more favourably by younger investors looking to build their wealth over a span of years or decades, rather than older investors who want to safeguard the nest eggs they’ve already built up and maybe benefit from the added income that dividends generate.

What are the defining characteristics of growth stocks?

1) Solid fundamental growth

The best way to evaluate a company and its stock is to measure it against its peers within the same industry. Growth stocks outperform their peers in key fundamental areas such as earnings and revenue growth. 

2) Competitive advantage

Great earnings growth doesn’t just appear out of nowhere. Leading growth stocks typically hold a competitive advantage over rivals in the same industry. They might benefit from more advanced technology, more robust supply chains, or better management teams than their competitors. 

3) Superior price gains than their competitors

Stocks with the most fundamental strength tend to experience the biggest price gains, which is why growth stocks tend to outperform many other stock types. Yes, you lose the steady flow of income that comes from owning a dividend stock, but you can make up for that lack of dividends by nabbing the biggest capital gains over an extended period of time.

4) High price-to-earnings ratio

Growth stocks’ rapid price moves often drive them to high valuations, based on price-to-earnings ratio. But here’s the thing about price-to-earnings ratios: they’re not always the best indicator of the attractiveness of a potential stock buy. Over the years, many growth stocks have racked up big price-to-earnings ratios before going on to even bigger and better gains. If a growth stock’s fundamental strength continues to improve even after years of gains, that could propel that stock’s prices even higher.

Here are some examples

If you’re on the lookout for some growth stocks for your own investments, here ares some companies that are worth looking into.

1) Alphabet (GOOGL)

The parent company for Google has outperformed other Internet services companies for years in terms of earnings and revenue growth. As of early June 2020 it had also erased nearly all the price losses it sustained during the coronavirus-induced market downturn.

2) Amazon (AMZN)

The largest retailer in the world has been on a hiring spree in 2020, growing even larger as smaller retailers went out of business and demand for deliveries spiked during the pandemic. Amazon has parlayed standout earnings growth into a huge run for its stock, which has soared to all-time highs.

3) Netflix (NFLX)

The lockdowns that swept the world in 2020 have supercharged demand for in-home entertainment options, which has been great for Netflix’s business. The online programming provider has seen some of its most dynamic earnings and revenue growth in 2020, as well as big price gains.

4) Zoom Video Communications (ZM)

Speaking of companies thriving during the COVID-19 pandemic, Zoom has capitalised on the gigantic spike in companies having their employees work from home. The video conferencing service provider has lapped Skype and other video-chat platforms in market share, resulting in big fundamental growth and lofty returns for investors. Zoom is one of the best-known growth stocks in recent times, having risen from relative obscurity to being included in the NASDAQ-100 as the pandemic changed the world.

How do I find growth stocks?

You can find the best growth stocks by using screening tools available at several different investing websites. With those tools, you can search for growth stocks based on parameters such as earnings growth. But you don’t have to go anywhere: you can also find the best growth stocks right here, as we assemble lists of top-performing growth stocks once a month here at Invezz.com.

Visit this guide for more information on how to find growth stocks > 

Now that you have a better understanding of growth stocks. Check out our next lesson, on value stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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