How to Choose and Invest in Growth Stocks

How to Choose and Invest in Growth Stocks

With the recent success of Canada’s own Shopify, growth investing is fresh on most Canadian investors’ minds. No doubt investing in growth stocks can catapult your investment portfolio, but how do you even get started? And what are some of Canada’s most promising growth stock companies? Let’s look closer at growth stocks and find out. What Are Growth Stocks?

Growth stocks are stocks of companies that are growing their revenue at a faster rate than the average of their sector — and these companies are usually willing to sacrifice profitability to grow as quickly as possible.

When you invest in growth stock companies you’re not investing in a company with a long, successful past: you’re investing in a company with a long, promising future. For that reason, growth stock companies share some common characteristics.

Here are five things you should know about them. 1. They have a competitive advantage

Growth stocks companies typically have an innovative product or service that no other business provides, or, if they do provide, not as well. They could boast new technology that no one else has, or patents to product lines prohibiting competitors from imitating them, at least for a period of time. 2. They have a loyal consumer base

Because of their unique products or services, growth stock companies usually win the masses over, driving stock values (and expectations) up. 3. They typically don’t pay dividends

In order to accelerate their expansion in their industries, growth stock companies reinvest profits — if any — back into the business, rather than paying out dividends. For investors, that often means you won’t make much in the short-term. But if the company is as promising as it seems, you can make extraordinary capital gains over the long-term. 4. They look expensive

Growth stocks usually have higher prices relative to the company’s earnings (or a high P/E ratio). That’s because investors are expecting higher earnings over the long-run, regardless of what they’re earning now. They may look expensive today, but three, five, even ten years from now, these prices will look unbelievably low. 5. Their market prices are more volatile

Growth stock prices are hypersensitive to change. When the company does better than expected, prices soar; when they disappoint, stock prices drop hard. Likewise, during a bear market , when the overall value of stocks declines, growth stocks tend to take the hardest hit, as investors become increasingly uncertain about the company’s future. How Are Growth Stocks and Value Stocks Different?

Value stocks are stocks that are trading below the price most analysts believe the stock is worth. In essence, they’re unadvertised bargains: you buy a share for a low price in the hopes that the company will rebound, rewarding you handsomely.

While growth stock companies are usually new startups, value stock companies are typically older, more well-established companies that have slowed down in recent years. Value stock investors see these companies as hidden gems: they believe their stocks are undervalued, and, with time, they’ll bounce back.

Though often pitted against each, growth stocks and value stocks both share a common strategy: buy low and sell high. One difference, however, is that value stocks often involve less risk. Because value stock companies are well-established, you’ll likely see some gains, even if they’re not exponential.

But market risk shouldn’t deter you from investing in growth stocks. If you have good reason to believe a company is on the verge of breaking out, by all means—invest in it. The returns you get on certain growth stocks could far exceed those gained through value stocks. How to Choose Growth Stocks in Canada

Growth stocks aren’t always easy to spot. Sometimes they’re growing quietly behind the scenes, just one innovation away from taking off. Other times they’ve gained a large following, but they’re so new, you’re unsure of their future success. While no one can predict the next Shopify or Amazon, here are a few things to look for. 1. Pay attention to cultural trends

Growth stock companies often ride the waves of societal changes and megatrends. Trader Joe’s and Whole Foods, for instance, wouldn’t have grown without the environmental and organic food movements. Amazon and Shopify wouldn’t have developed without a growing desire for better e-commerce experiences. And Netflix wouldn’t have gone anywhere if people hadn’t been frustrated with Blockbuster’s late fees and high cable prices.

You may find it difficult to stay on top of emerging trends, but here’s the thing—usually, you’re a part of […]

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