What You Need To Know About Growth Stocks
Investing in growth equities might be an excellent method to acquire life-changing wealth in the stock market, but of course, you need to know about growth stocks to know to buy – and when.
Here’s a quick guide to growth investing to get you started. With these tools and techniques, you’ll be able to create a portfolio that will thrive in the long run with growth equities.
What is a growth stock?
Growth stocks are firms that grow their revenue and earnings faster than the industry or market as a whole. However, picking rising stocks isn’t enough when it comes to growth investing.
A business that is on the rise has, at times, developed a ground-breaking product or service that is currently gaining market share in well-established industries, entering new markets, and even establishing entirely new sectors.
Businesses that outpace the market for lengthy periods are typically rewarded by the market, resulting in fat returns to investors. And the greater they develop, the better their profits can be.
High-growth stocks are typically more expensive in terms of profitability ratios such as price-to-earnings, price-to-sales, and price-to-free-cashflow ratios than value stocks. In addition, because growth companies generally use earnings to promote growth and innovation, they do not pay dividends.
Despite their lofty price tags, the finest growth equities might still provide investors with fortunes in profits as they fulfill their enormous potential.
DID YOU KNOW…
Growth stocks are firms that grow their revenue and earnings more quickly than the industry or market.
Great growth stocks
To give you some examples, here are ten excellent growth stocks currently available in the stock market.:
- Zoom (NASDAQ:ZM)
- Shopify (NYSE:SHOP)
- Block (NYSE:SQ)
- Etsy (NASDAQ:ETSY)
- MercadoLibre (NASDAQ:MELI)
- Netflix (NASDAQ:NFLX)
- Amazon (NASDAQ:AMZN)
- Meta Platforms (NASDAQ:FB)
- Salesforce.com (NYSE:CRM)
- Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL)
The range of growth stocks is vast, as this list demonstrates. Moreover, you can find growth stocks in various sectors both within the United States and worldwide. And although all of the firms on this list are larger businesses, small and mid-size enterprises might also provide opportunities for development investors.
An exchange-traded fund, such as the Vanguard Small-Cap Growth ETF (NYSEMKT:VBK), is a fantastic way to invest in a range of small-cap growth stocks. This fund aims to track the performance of the CRSP US Small Cap Growth Index, which makes it simple to put money into around 580 small-cap growth companies at one time.
How to find growth stocks
To discover excellent growth stocks, you’ll need to:
- Identify significant long-term market changes and the best-positioned firms to capitalize on them.
- Choose companies that have a lot of competitive advantages.
Narrow your list to businesses with large addressable markets by considering the size of their market and the number of employees.
Identifying trends and what’s driving them
Companies that can capitalize on significant long-term trends might increase their sales and earnings for years, resulting in investors’ wealth. COVID-19 accelerated many trends that were already well underway.
Here are a few examples:
- E-commerce: Amazon, Shopify, and Etsy are poised to make money in the United States (and many international markets) as more customers conduct their purchases online. In Latin America, MercadoLibre has a commanding market share of the internet retail sector.
- Digital advertising: Meta (formerly known as Facebook) and Alphabet control most of the digital ad market. They are poised to reap significant rewards as marketing budgets move from TV and print to online platforms.
- Digital payments: Accepting debit and credit cards through Block (formerly known as Square) is assisting in driving the global trend away from cash toward digital forms of payment by allowing companies of all sizes to take card payments.
- Cloud computing: The migration of computing power from on-premise data centers to cloud-based servers occurs. Amazon’s cloud infrastructure services make this feasible, but Salesforce.com provides some of the most effective cloud-based software.
- Cord-cutting and streaming entertainment: Hundreds of millions of individuals cut the cable cord and switch to cheaper and more convenient streaming alternatives. Netflix is the world’s largest streaming service, so it’s a fantastic way to take advantage of this trend.
- Remote work: During the pandemic, many companies required remote work arrangements. According to studies, as the pandemic is ending, businesses are continuing to embrace flexible working practices due to their financial advantages and workforce benefits. Based on its user-friendly cloud-based phone and video collaboration solutions, Zoom will continue to profit from this movement.
The key is to invest in these types of trends and firms as soon as feasible. The sooner you get in, the more money you’ll profit from the most influential trends. However, some of the most significant developments can endure for many years or even decades, allowing you plenty of time to reap your portion of their profits.
Prioritize companies with competitive advantages
It’s critical to invest in firms with competitive advantages that last. Otherwise, their rivals might catch up with them; and their growth may not be sustainable.
In times of deterioration and upheaval, competitive advantages become increasingly significant. A strong competitive advantage will aid firms in surviving and growing through market downturns, whereas firms without a competitive edge will struggle.
In reality, in early 2022, many technology-focused growth equities saw significant selling. Many top growth companies reduced their share prices by more than 50 percent. It may be a good time to invest if you can identify firms with substantial competitive advantages that are sold off alongside the rest of the market and subsequently recover.
Some competitive advantages are:
- Network effects: Here’s an example with Facebook. Each person who joins its social media network benefits the entire group. Network effects make it challenging for new entrants to dethrone the existing market leader, and Facebook’s 2.9 billion users ensure that a competing social networking service will not succeed.
- Scale advantages: Another significant benefit is the difference in size. Amazon, for example, has a vast worldwide fulfillment infrastructure that its smaller rivals will have a difficult time duplicating.
- High switching costs: Switching costs are the expenses and hassles associated with switching to a competitive product or service. Shopify, an online retail system for more than 1 million businesses, illustrates a firm with high switching costs. It’s unlikely that a firm will go through the trouble of changing to a competitor once it starts using Shopify as its central online operation platform.
Pinpoint companies with large addressable markets
Last but not least, you’ll want to invest in businesses with large addressable markets and a long-term runway for expansion. Industry reports from research companies such as Gartner and eMarketer – which give estimates of industry sizes, growth projections, and market share figures – can be helpful.
A business’s potential is limitless, as long as you provide a service or product people want. The bigger the chance, the larger a firm may eventually become. And the sooner it reaches its growth phase, the longer it can grow at a rapid rate.