Growth Stocks – Meaning, Features & Benefits

Investors must be aware of the different stock options available in the market. While dividend-paying stocks are beneficial, one must also invest in growth stocks. These stocks can grow at an above-average rate, and one can earn attractive returns by investing in them. Before investing in these stocks, you must understand their features and benefits. Read on to understand growth stocks in detail in this blog.

What are Growth Stocks?

Growth stocks belong to companies showing a high growth potential. These companies are expected to grow above average, which is more than other companies in the market. Since such companies grow at a rapid pace, the value of their stocks increases. One can earn attractive returns through capital appreciation of these stocks. These companies are less likely to pay dividends to existing shareholders as earnings are reinvested. The overall value of companies with growth stocks is also expected to increase.

Example of Growth Stocks

You can find several growth stocks in the stock market. To identify these stocks, one can consider the P/E (Price to Earnings) ratio,PEG ratio, earnings growth, revenue growth, and other factors. For instance, Lloyds Metals is a growth stock for investors in India. The stock has P/E and PEG ratios of 24.12 and 0.19, respectively. Also, the ROCE% of Lloyds Metals is 81.99. These metrics related to Lloyds Metals are above average or more than many other stocks.

Features of Growth Stocks

Now that you understand the meaning of growth stocks, let us discuss their features.

Firstly, these stocks often operate in industries with significant growth potential. These industries could include technology, healthcare, e-commerce, or renewable energy, among others. Companies within these sectors are often at the forefront of innovation and are positioned to capitalize on emerging trends and changing consumer preferences.

Additionally Read: What is Demat Account?

Secondly, they typically exhibit strong revenue and earnings growth rates. These companies are adept at expanding their market share, introducing new products or services, or penetrating new markets, leading to robust top-line and bottom-line growth. Investors are attracted to these stocks because of the potential for substantial capital appreciation driven by increasing profitability.

Moreover, one of the best features of growth stocks is that they often reinvest a significant portion of their earnings into the business to fuel further expansion. Rather than distributing profits to shareholders in the form of dividends, these companies prioritise reinvestment to fund research and development, marketing initiatives, or acquisitions. This reinvestment strategy aims to sustain high growth rates over the long term, enhancing shareholder value.

Additionally Read: Best IT Sector Stocks To Invest

Additionally, these stocks often exhibit higher volatility compared to value stocks or dividend-paying stocks. The market’s expectations for future growth and earnings can lead to significant price swings in response to news, quarterly earnings reports, or changes in market sentiment. While this volatility can create short-term fluctuations in stock prices, it also presents opportunities for investors to capitalize on price momentum and capitalize on short-term trading strategies.

Why Should You Invest in Growth Stocks?

Here are some of the reasons for investing in growth stocks:

  • Attractive Returns: They can provide high returns in the long term. Since these stocks grow at a significant rate, they offer high returns. They might not offer regular income through dividends but will help earn high returns in the long run.

  • Hedging Against Inflation: These stocks can help investors hedge their portfolios against inflation. Since they offer high returns over time, investors’ purchasing power increases. Even when prices rise, you can earn attractive returns.

  • Compounded Returns: These companies usually re-invest their earnings into the business, as they don’t pay dividends. Such stocks offer compounded returns over time to investors. Other companies might not reinvest their earnings, as they regularly pay dividends to shareholders.

Disadvantages of Growth Stocks

Now that you have understood the growth stock benefits, let us discuss their cons:

  • These stocks are high-risk investments, especially for short-term investors. Investors with a low-risk appetite must chooseblue-chip stocks.

  • You might get zero or minimal dividends on these stocks. They are not fit for investors looking to develop a regular income stream.

  • High Volatility in the Short Term: Their price might fluctuate often in the short term. High volatility might not be suited to low-risk investors.

  • Risk of Overvaluation: Investors might overvalue a stock. It is essential to use different metrics to find a growth stock with potential for appreciation.

How Do You Know if a Stock is Growth or Value?

Here’s how to differentiate a growth stock from a value stock:

  • Growth stocks show an increase in revenues over time. The earnings of these stocks will be more than that of value stocks.

  • Growth stocks will have a higherP/E ratio than value stocks

  • The P/B (Price to Book) ratio for growth stocks will be higher

  • Growth stocks are not known to offer dividend yields. On the other hand, value stocks offer dividends to existing shareholders.

What are a Few Tips for Selecting the Best Growth Stocks?

Finding the best growth stocks can be a challenging task. You can search for these stocks in different industry sectors. Investing in different sector stocks will help you diversify your portfolio. You can reduce portfolio risks by investing in different industry sectors. You can research companies to find the best growth stocks. You can indulge in fundamental andtechnical analysis to find the best stocks in the market.

Investors must be familiar with the P/E ratio, PEG ratio, P/B ratio, and other metrics used to evaluate these stocks. Similarly, you must be familiar with company fundamentals to find the best growth stocks. Investors must have a long-term view when investing in such stocks. Also, consider your risk tolerance before investing in these stocks, as they come with high risks.

Differences Between Growth Stocks and Value Stocks

One might confuse growth stocks with value stocks in the market. Here are the dissimilarities between these stock types:

Growth Stocks Value Stocks

They show above-average growth over time.

They show slow but stable growth over time.

These stocks come with zero or minimal dividend yield for investors.

Value stocks come with dividends for investors to build a stable source of income.

The P/E and PEG ratios for these stocks are high.

Value stocks usually have a lower P/E ratio.

These stocks attract investors with increased risk appetite. Investors looking for capital appreciation over the long term invest in growth stocks.

Investors with low risk appetite prefer value stocks in the market. Such investors prefer steady returns at regular intervals.

These stocks tend to be volatile in the short term.

Value stocks usually have a lower price volatility.

Growth stocks represent shares in companies poised for substantial earnings and revenue expansion, often found in burgeoning industries. Investors eyeing these promising opportunities may consideropening a demat account, facilitating seamless electronic trading and management of their stock investments.

Conclusion

Growth stocks are perfect for long-term investors looking to build substantial wealth. However, one must know that these stocks will not offer dividends at regular intervals. Also, they experience increased volatility in the short term. Investors who remain invested in these stocks can earn attractive returns in the long run. Find the best growth stocks today!



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