Growth stocks: what are these securities and how to identify the most promising companies
In the investment community, growth stocks are generally defined as securities with a high potential for price appreciation over the long term.
For the most part, these are fairly young companies that show good financial results and direct all net profits towards 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.
Growth stocks are typically inexpensive and can rise significantly in price over a short period of time, sometimes exceeding 100% per annum, and in exceptional cases, 1000%.
How to identify growth stocks?
Identifying growth stocks is a key task for any investor. To select the right security, one should focus on economic sectors with the greatest growth potential:
Promising sectors of the economy include information technology and everything related to it, healthy food production, electric transport, and clean energy:
• Information technology – primarily companies developing software and providing online services. The world is increasingly moving into virtual reality, so the shares of companies working in this area will grow.
• Healthy food production – the trend for a healthy lifestyle is stimulating demand for eco-friendly products. Demand for soft drinks and various dietary supplements is growing exponentially.
• Electric transport – or to be more precise, the growth stocks in this case are not the electric car manufacturers themselves, but companies engaged in the production of components for electric vehicles, scooters and, in the future, airplanes and ships.
That is, those who produce batteries, electric motors and raw materials used in these industries.
• Clean energy – the demand for clean electricity generation equipment is growing every year. Rising energy prices are only spurring this process, so investing in shares of companies producing solar panels and wind turbines can be quite profitable:
And from a moral point of view, buying such securities is more pleasant than investing in shares of arms companies.
Company age – companies less than five years old often have good price growth potential. While it's always tempting to invest in an established brand like Tesla, you can't expect record growth from such companies' stocks.
Financial indicators – and 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 it receives to develop and implement new technologies, then the likelihood that it will continue to generate 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 significant demand.
Again, if we return to the Tesla example, before showing record growth, the company was already familiar to almost every investor.
And most importantly, when choosing growth stocks, remember the key rule: buy what you like and what you understand at least a little. For example, if you're a fitness trainer, you should pay attention to companies that produce dietary supplements; if you're a programmer, you might find it easier to choose stocks in the IT sector.
