There are several strategies that investors can apply in the stock market to make money. One such strategy is purchasing growth stock shares—these are companies whose profits are expected to grow at an above-average pace. If a company keeps this up over the long term, it gets a higher share price and the investors reap big returns via capital appreciation. An investment like this doesn’t come without risk. This is why you should understand the basics and know how to minimize these risks.
If you’re ready, you must be wondering how you can find growth stock worth investing in. Well, check out the methods below.
Growth Stock: Definition
A growth stock is basically a company whose profits are expected to rise at a rate that is higher than average, compared to other businesses in the industry or market. Investors find these stocks appealing because the value of a company, according to Wall Street valuation, is based on a number of its earnings. If a company grows its profits faster, then its share price will also increase quickly. But profit is not the only determinant of success. Other things such as a solid business model and huge market opportunities also come into play.
Where to Find Growth Stocks
Many high-growth stock companies barely existed several decades ago. Today, however, they are household names. Take Ulta Beauty (NASDAQ:ULTA), Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) for instance. They were tiny players initially but they managed to rise to the top.
How do you identify such a company while it is still young? The first simple method is assessing your consumer habits. What services or products have you started buying recently but didn’t use them in the past? If you realize that many people are using a new service or product too much, then it’s possible that the company is worth looking into.
Once you identify such a product or service, perform an internet search to see the company behind it. Then assess it a little more to see whether you have a winner.
Macro Societal Trends
A massive change in society usually benefits most growth stocks. If a company can capitalize on these trends, they can enjoy high profits—as long as the trend takes years.
Examples of current macro trends include:
Health and wellness: people are becoming keener about their health and lifestyles.
War on cash: transactions are going cashless globally. Companies like Mastercard and Visa will benefit from this.
Increase in online advertising: Facebook, The Trade Desk and Hubspot are likely to excel from the trend.
The U.S population is growing older: companies that cater for seniors are worth investigating.
Piggyback on Legends
See what money managers are investing in. Not all of them are worth following but here are some well-respected ones.
- Carl Icahn, Icahn Capital Management
- Chuck Akre, Akre Capital Management
- Pat Dorsey, Dorsey Asset Management
Stock Screening Tools
Stock screeners such as Finviz will help you find growth ideas. While using them to find growth stocks, use the traits below:
- Balance sheet
- Projected profit growth
- Sales growth
- Market cap