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What is a Growth Stock?

A growth stock is a stock in a company that still has a lot of potential to grow. Investing in growth stocks can be be very profitable, in fact much more so than investing in blue chip stocks. However, the potential for higher returns is often a trade off for greater risk.

Growth stocks often have a relatively high P/E (Price to Earnings) ratio when compared to lower risk stocks. These stocks also typically do not pay a dividend to shareholders as keeping the money in the company is deemed more profitable.

Examples of growth stock

A good well known example of a growth stock could be google. They first floated in 2004. Below is a chart of their stock:

When it comes to growth stock investing, google is a success story. Between 2004 and 2007 the stock went from 100 to 700. A huge increase in value. For a lot of this period the P/E ratio of the stock has been around the 30 mark. If you want to look into the google stock in more detail, click here to go to google finance.

Of course, whilst google is a big success story, many growth stocks go down in value and sometimes even end up completely worthless. So growth stock investing must always be considered high risk.

How it can go wrong

Some of the tech companies provides good examples of things going wrong. Even big names like Microsoft, whose stock fell by around 50% in 2000. Even in 2009, the stock is nowhere near its 2000 high.

Best Brokers for growth stocks

Amongst the best brokers for growth stock investing are Zecco, Optionshouse and Tradeking. They offer low trading fees, good execution and are well known and respected.

Conclusion

In conclusion, investing your hard earned money in growth stocks can lead to excellent returns if you make the right stock choices. As I mentioned above, google would have earned up to 700% if you invested at the start. However, google is not a one off, but many companies will not do anything like as well.

It is riskier than investing in well established companies that have been paying dividends for years.

It all comes down to your risk tolerance level. If you are a younger investor, who can afford to lose money then you may be better suited than an older investor who is investing for retirement.