Growth stocks - what this type of securities is and how to identify the most promising companies
In the investment environment, growth stocks are commonly referred to as securities with a high potential for price appreciation in the long term.
For the most part, these are fairly young companies that show good financial results and use all their net profits for development.
Often these companies belong to promising sectors of the economy, so it can be assumed that as the market grows, the value of companies in this sector will also increase.
As a rule, growth stocks are not expensive and can increase significantly in price in a short period of time; sometimes the increase in the value of such securities exceeds 100% per annum, and in exceptional cases, 1000%.
How to identify growth stocks?
Identifying growth stocks is the main task of any investor; in order to choose the right security, you should focus on the sectors of the economy with the greatest growth potential:
Promising sectors of the economy - information technology and everything connected with it, production of healthy food, electric transport, clean energy:
• Information technology – primarily these are companies developing software and related to the provision of online services. The world is moving more and more into virtual reality, so the shares of companies working in this direction will grow.
• Production of healthy food – fashion for a healthy lifestyle stimulates demand for eco-branded products. The demand for soft drinks and various dietary supplements is growing rapidly.
• Electric transport – or, to be more precise, the growth stocks in this case are not the manufacturers of electric cars themselves, but companies engaged in the production of components for electric vehicles, scooters and, in the future, aircraft and ships.
That is, those who produce batteries, electric motors and raw materials that are used in these industries.
• Clean energy – the demand for equipment for the production of clean electricity is growing every year. And rising energy prices only stimulate this process, so investing in shares of companies producing solar panels and wind generators can be quite profitable:
And from a moral point of view, buying such securities is more pleasant than investing in shares of weapons companies.
Age of the company – most often, companies under five years old have good potential for price growth. Yes, you always want to invest in an already popular brand such as Tesla, but you can no longer expect record growth from the shares of such companies.
Financial indicators - here you should pay attention not only to the amount of profit received over the past year, but also where this profit was spent.
If a company wisely uses the funds received for the development and implementation of new technologies, then the likelihood that it will continue to make a profit only increases.
Brand recognition - it is very risky to invest in companies with a low level of capitalization; it is desirable that the selected securities are already in noticeable demand.
Again, if we return to the example of Tesla, before showing record growth, the company was already familiar to almost every investor.
And most importantly, when choosing growth stocks, do not forget the main rule - buy what you like and what you understand at least a little. For example, if you are a fitness trainer, then you should pay attention to companies involved in the production of dietary supplements; if you are a programmer, then it may be easier for you to choose stocks belonging to the IT sector.