A growth stock is a stock in a company that still has a lot of potential to grow in the future. Investing in growth stocks can be be very profitable, in fact much more so than investing in blue chip stocks, and certainly potentially more profitable than bank savings accounts, CDs or government bonds. However, as typical in investing, 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 types of stocks also typically do not pay a dividend to its 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 search engine giant, Google. They first floated in 2004. Below is a chart of their stock:
When it comes to growth stock investing, Google is certainly 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, while Google is a big success story, many growth stocks tend to go down in value and sometimes even end up completely worthless. So growth stock investing must always be considered high risk as there is the very real possibility that you could lose 100% of your hard-earned money. That is a though pill to swallow for many investors, and that is the reason that growth stocks are not always right for every situation.
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, has fallen victim to the drawbacks of being a growth stock. Even in 2009, the stock was nowhere near its 2000 high, and has continued to trade flat in the following years.
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. As investing in growth stocks often involves frequent trading – an investor must be prepared to make a move if your position moves against you – low commission fees are crutial to the success or failure of your trading plan.
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 typical of every growth stock, and many companies will not do anything like as well.
Investing in growth stocks is riskier than investing in well established companies that have been paying dividends for years. The potential to lose 100% of your money is there with growth stocks, while you are unlikely to lose 100% of your investment in a blue-chip company.
It all comes down to your personal 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, and does not have the longer time frame to recoup losses should the market take a turn lower.