Basics of Fast-growing Stocks


If you are just getting into the world of investing, it can be a little overwhelming. It could be beneficial to start by learning the fundamentals in a certain area — such as growth stocks.If you are just getting into the world of investing, it can be a little overwhelming. It could be beneficial to start by learning the fundamentals in a certain area — such as growth stocks.

What is a growth stock?

According to Investopedia, “A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the market.”

Characteristics include stocks from companies with a firm hold on their market share, an extremely loyal customer base, manufacturing scale — think of it as buying parts in bulk — and advanced or unique product lines. For example, technology companies are generally growth stocks. The opportunity for advancement is virtually limitless; that’s why growth companies do not pay out dividends.

“The company’s goals are best served by reinvesting its earnings into product research and development, thereby fueling expansion,” Investopedia states.

However, it is for that same reason that growth stocks carry a lot of risk. Shareholders rely solely on the company’s success to generate a return on their investment. This is where you see investors and shareholders losing money when a company’s growth is not what’s expected; market confidence wanes and share prices begin to drop.

Growth vs. Value

The opposite of a growth stock is a value stock. As the name may suggest, value stocks are those that you can purchase shares of at a great value — due to disappointing earnings reports, negative media attention or legal troubles, for example. Value stocks are still “valuable,” however, because they still have good financials and a solid dividend payout history, but the market sees them as underrated, which is an advantage in that they often fly under the radar of typical investors.

“Value stocks are rarely glamorous and are often older companies that, while they won’t be going anywhere soon, aren’t exactly on the cutting edge of industry innovation,” Investopedia states.

It’s been said that everything is better in moderation, and that holds true in this case as well. Most seasoned investors tend to compose their portfolios with a mix of both growth and value stocks in order to maximize the benefits of each type.

As familiarity on the subject of investing increases and you become more confident in your knowledge, it is important to remember these are just general guidelines and not hard and fast rules. The best bet is to always do thorough research before making any financial decisions, and perhaps consult a financial planner.

 

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