You have finally made up your mind to buy your first growth stock. It could be a wise decision, by the way.
However, before splashing the cash, you need to learn more about growth stocks. Having a sound knowledge about them will enable you to make an informed investment decision.
Continue reading to know what growth stocks are.
What Growth Stock Means
Growth stocks are stocks from companies with impressive growth potentials. Such companies pay investors low or no dividends. Nevertheless, the long-term returns are sometimes electrifying.
Growth companies are expected to perform better than their peers regarding the stock market and earnings. They have higher growth rates as against the market’s mean growth.
Note: Growth stocks, as the name implies, grow or rise faster in value than average stocks. And as a result, they tend to generate earnings much quicker.
Amazon (AMZN) is an example of a growth company. And it’s unarguably one of the best performing growth companies, as far as the e-commerce stock is concerned.
Even in the wake of the COVID-19 pandemic, Amazon and most e-commerce businesses have flourished. Most consumers now see online shopping as a necessity.
Other popular growth stock companies are Facebook (FB), Apple (APPL), and Netflix (NFLX). The growth rate of these companies has been massive over the years.
Attributes of Growth Stocks
1. Dividends Are Zero or nonexistent
If you’re expecting instant dividends from your stock investments, a growth stock may not be a wise choice for you.
Dividend stocks pay dividends to investors from their retained earnings. And as indicated in the stock dork, you can land dividend stocks under 5.
On the other hand, growth stock companies, as the name implies, focus more on business growth. They prefer to reinvest their retained earnings in the business’ growth to generate higher revenues long-term.
So, a growth stock may pay zero or little dividend to investors. But after a couple of years, investors could start smiling to the bank.
The fastpaced growth rate of growth companies may not benefit investors in the short term. That’s because revenues generated are being plowed back into the business.
In the long-term, investors have a higher chance of reaping the benefits of their growth stock investments. As the company grows, the possibility of investors receiving substantial revenue via capital gains equally increases.
No investment is risk-free. It’s only wise for investors to weigh up things and take risks that won’t rattle them financially when the company falls.
Growth stock investments look like the real deal. But before you venture into it, know you’re making a long-term investment.
Furthermore, you can’t be sure of making a profit after years of investing. Growth stock investors only profit when the company performs well.
The fact that these stocks pay little or no dividends in the short-term makes their risks higher. Investors have to wait for years and expect the growth company to perform well before they can start reaping benefits.
Investors may incur massive losses if things eventually go wrong with the company after years of waiting. But if the reverse was the case, the reward can be massive.
4. Competitive Advantage
Growth companies tend to possess a specific competitive advantage, enabling them to grow faster than their peers in the same business niche.
This competitive advantage could be a blessing in disguise for these companies. It helps them develop what is known as USP (unique selling proposition), improving their chances of selling more and growing bigger than their peers.
Growth stocks offer life-changing opportunities in the stock market, provided you invest in the right company. Hopefully, this post will enable you to have a better understanding of growth stocks.