You must be wondering what to do when the market’s wild ride drops you on the cliffhanger. Well, you can simply listen to your favorite country songs over a cup of coffee if you had chosen your growth stock right!
What is a Growth Stock?
Growth Stock is a share of a company which operates on the model of reinvestment of profit to yield a higher rate of returns than the industry peers. Being a growth investor, one typically needs to focus on the companies with significant growth potential. The idea is to invest in the companies whose earnings are expected to grow at an above-average rate compared to the market or competitors in the industry.
But the growth stock generally comes at the cost of dividend! Usually, the companies identified as growth stocks do not give any dividend (specifically, when the companies are at an early stage) rather, they reinvest their profits to achieve above than ordinary earnings in the future. As a result, stock prices of that company soars to trade at higher levels where you can simply sell your stock and mint money from capital gains.
Why choose Growth Stocks?
Let’s say you are investing with the long-term prospects to have a greater return at the time of retirement or say after 5 years, growth investing is the best option to opt out for. Growth investing allows the investor to earn substantial gain in one shot through long-term or short-term capital appreciation if all horses come to play well in terms of the business.
You shouldn’t be surprised if your growth stock outperforms the market just in the short period of time, as the strong growth strategy comes into play.
How to choose a growth stock?
Although there is no standard method of choosing growth stock, one can look around and identify the goods and services that are gaining momentum in the current market. An individual needs to track down their own buying habits and identify what are those things that are currently in use but were never being discussed or imagined in the past. Let’s take the online payment solutions companies like Afterpay, before the emergence of the internet or even after that, we hardly thought of paying money just by simple touch in the real time, but the high-end technology and transaction integrity engines have made that possible, taking the Fintech stock seen to be trading at its peak. Well, you can further apply some simple techniques while picking the growth stock:
Historical Performance: As it is wisely said history repeats itself, it is very important to analyze the past performance of the company. The company should have strong earnings growth record in their past 2-5 years’ performance. If it is a new company, you can check what is their earnings outlook and most importantly, what are those factors on which that earnings guidance has been placed.
Return on Equity: It is vital to see how much profit the company has generated by using your investments; and there comes the role of Return on Equity (ROE). It can be used as a parameter to calculate how much profit did company make with the money shareholders have invested and then the present ROE can be compared with the past years’ ROE of the industry and the company.
Profit margins: Just deduct all expenses from sales and divide it by sales, and then see what profit margin the company has achieved. Because if they are having tremendous growth in sales but couldn’t have good control over cost, they will land up into reporting poor earnings.
Stock Performance: Ideally, a stock price should double itself in five to seven years. If you don’t see the substantial growth in the past long-term performance of the stock, then it’s definitely not the one that you are looking for!
These aspects with analysis of key financial parameters and some bit of technical evaluation on charts can help identify good picks in various sectors.
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