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Lesson 8: Growth stocks

Lesson 8: Growth stocks

Growth stocks are expected to rise faster than the overall market and offer bigger gains for investors who don't mind risk.

Growth stocks thrive during economic expansions when interest rates are low. Since the financial crisis in 2008, growth stocks have seen a massive rally, significantly outperforming value stocks and the major stock indices.

Unfortunately, with inflation skyrocketing the era of historically low-interest rates and ever-expanding stock valuations has ended abruptly. Investors concerned about a spike in rates have abandoned growth stocks and rotated into value stocks. As a result, the sky-high valuations among growth stocks have come back to earth and may offer plenty of buy-the-dip opportunities for opportunistic long-term investors.

There is quite a bit you should know before you dive in. If you want to invest in growth stocks right away, here is a quick guide that can help:

  • Research your growth stocksIdentify powerful long-term market trends and the companies with strong competitive advantages and large addressable markets.
  • Define your strategy trading lets you speculate on the price movement; dealing lets you take direct ownership of the stocks.
  • Take your positioncreate an account with us to start investing in growth stocks.

Below we have included some larger players as well as three steps processes to find the best growth stocks based on your risk appetite and specific areas of interest.

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What Is a Growth Stock?

A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is so that short-term growth can be accelerated. Issuers of growth stocks are typically businesses that desire to reinvest any earnings they accrue. When investing in growth stocks, investors hope to profit from capital gains when they eventually decide to sell their shares in the future.

Growth stocks are very often smaller, newer companies, or industry disruptors. Whatever their size or age, growth companies usually offer unique services and products, and frequently own novel technologies or intellectual property that puts them ahead of other companies in the same industry.

Growth stocks are frequently smaller, younger businesses or market disruptors. Growth companies, regardless of their size or age, typically provide distinctive services and goods and frequently possess novel technology or intellectual property that puts them ahead of other businesses in their industry.

Understanding Growth Stocks

Any sector or industry may have growth stocks, which often trade at a high price-to-earnings (P/E) ratio. Although they might not be making money right now, they should in the future.

With growth stock, an investor may profit from their investment only when they eventually sell their shares because they don't normally give dividends. When the time to sell the stock comes, investors suffer a loss if the company performs poorly.

Growth stocks frequently have similar characteristics. For instance, emerging businesses frequently provide distinctive product lines. They might have access to technologies or own patents that put them ahead of rivals in their field. To continue to be in front of competitors, they reinvest profits to develop even newer technologies and patents to ensure longer-term growth.

Because of their patterns of innovation, they often have a loyal customer base or a significant amount of market share in their industry.

Growth Stocks vs. Value Stocks

Value stocks are different from growth stocks. Investors anticipate growth stocks to experience significant capital gains due to the underlying company's rapid growth. These equities may appear to be expensive as a result of this expectation due to their typically high price-to-earnings (P/E) ratios.

Value stocks, on the other hand, are frequently overlooked or undervalued by the market, yet they might eventually increase in worth. Additionally, investors aim to gain from the dividends they normally pay. Low price-to-earnings (P/E) ratios are typical for value equities.

For portfolio diversity, some investors can strive to incorporate both growth and value equities. Others can want to specialize by putting more of an emphasis on value or growth.

How to Find the Best Growth Stocks

If you decide to invest in growth stocks, it can be hard to identify the right growth companies. To find the best growth stocks for your stock portfolio, you’ll need to:

1. Identify powerful long-term market trends

The search for the best growth stocks begins with identifying macro trends that change the way people do everyday things. Digitization, for example, has been a dominant trend over the past two decades. It's also paved the way for other megatrends such as the rise of e-commerce and streaming entertainment and the move toward cashless payments.

Once growth stock investors identify a trend -- say, the rollout of driverless cars or the shift to renewable energy -- that could be "the next big thing," they then identify which specific companies stand to benefit from the changing market dynamics associated with the trend.

Changing societal trends can have a huge impact on growth stocks. For example, the coronavirus pandemic caused a renewed focus on home fitness, health companies, or remote work that saw enormous gains.

2. Prioritize companies with competitive advantages

It’s also important to invest in growth companies that possess strong competitive advantages. Otherwise, their competitors may pass them by, and their growth may not last long.

Competitive advantages become especially important during turbulent times such as the pandemic or periods of high inflation. A strong competitive advantage will help companies survive and thrive through market downturns, while those without a competitive advantage will struggle.

Some competitive advantages are:

  • Network effects: can make it difficult for new entrants to displace the current market share leaders META and Alphabet.
  • Scale advantages: Amazon is a great example in this category because its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate
  • High switching costs: difficulties involved in switching to a rival product or service. Shopify is a perfect example of a business with high switching costs.

3. Further narrow your list to companies with large addressable markets.

Finally, you’ll want to invest in businesses with large addressable markets -- and long runways for growth still ahead. Industry reports which provide estimates of industry sizes, projections for growth, and market share figures -- can be very helpful in this regard.

The larger the opportunity, the larger a business can ultimately become. And the earlier in its growth cycle it is, the longer it can continue to grow at an impressive rate.

Alternatively, investors can buy shares in growth-oriented exchange-traded funds (ETFs). Prospective shareholders should first understand and agree with how a fund selects investments for its portfolio. These ETFs invest in fast-growing companies with the hope of matching or outperforming benchmark indices.

Growth ETFs are a popular option for investors who want to gain portfolio exposure to growth stocks without having to research and choose individual stocks themselves.

You can find an ETF to suit any investment strategy you desire by using CAPEX WebTrader.

Top Growth Stocks to Watch in 2023

Companies that can capitalize on powerful long-term trends can increase their sales and profits for many years, generating wealth for their shareholders along the way.

Here are some examples of growth stocks that generated an astronomic returns in the last decades.

Amazon (AMZN)

amazon growth stock
Source: CAPEX WebTrader

Almost all the characteristics of the prototypical growth stock are present in Amazon (AMZN). It has increased more quickly than market averages for several years; over the last five years, it has increased by more than 400% versus 95% for the USA 500 index. Additionally, it works in a developing industrial area, has a high PE ratio, doesn't pay dividends, and has an above-average pace of EPS growth (online retail).

Apple (APPL)

apple growth stock
Source: CAPEX WebTrader

Apple (APPL), like Amazon, checks most of the growth stock prerequisites. It likewise operates in the tech industry, has a high PE ratio, and has increased in value by more than 400% during the last five years. On the other side, its anticipated EPS growth rate for the following several years isn't noticeably higher than market averages, suggesting that the company may be maturing.

META (FB)

meta growth stock
Source: CAPEX WebTrader

Facebook and Instagram's parent company, Meta Platforms, also runs one of the biggest internet advertising businesses in the world.

Shares of Meta (FB) are down in 2022, primarily due to worries about the business's slowing growth. In fact, the second quarter marked the "first ever" quarter of negative revenue growth for Meta, with a 1% year-over-year decline in revenue. According to analysts, the sell-off presents a purchasing opportunity, and Meta's ad revenue growth will reaccelerate.

Tesla (TSLA)

tesla growth stock
Source: CAPEX WebTrader

Tesla (TSLA) is something of a controversial growth stock, largely because its fundamentals don't appear to fully rationalize its staggering growth. For example, while it overtook Toyota in 2020 to become the world's biggest carmaker in terms of market capitalization, it sells nowhere near as many vehicles as its Japanese rival. Its EPS did grow by 69% between 2019 and 2020.

Alphabet (GOOG)

alphabet growth stock
Source: CAPEX WebTrader

Alphabet (GOOG) is the parent company of search giant Google and the streaming video platform YouTube. It operates as one of the largest online advertising businesses in the world.

The U.S. advertising business has slumped in 2022, and Alphabet’s 7% YouTube revenue growth in the second quarter was particularly soft. However, according to analysts GOOGL has an attractive valuation, is facing limited competitive risks, and is extremely profitable, reporting $16 billion in net income last quarter. Alphabet is expected to maintain double-digit revenue growth through at least 2024.

Block Inc. (SQ)

block growth stock
Source: CAPEX WebTrader

Block Inc. (formerly Square), a payments company, is the newest of the five growth stocks highlighted here, which could explain why it has seen the most growth (save for Tesla). Over the past five years, between the second quarter of 2017 and the second quarter of 2022, the business increased gross profit at a compound annual rate of 50%. Today, Block is a powerful force in the world of payments.

Other growth stocks to watch:

  • Constellation Energy (CEG) is a U.S. utility stock operating the nation’s largest nuclear and renewable electricity generation plant fleet.
  • Johnson Controls (JCI) designs intelligent buildings, energy efficiency solutions, transportation systems and other next-generation infrastructure.
  • SAP is a leading German enterprise application software stock.
  • ASML is a Dutch market leader in lithography tools used in the semiconductor manufacturing process.
  • French oil major Total SE is one of the largest energy companies in the world.
  • ABB is a Swiss technology company specializing in electrification products, robotics, and industrial automation.
  • Vodafone (VOD) is a British multinational telecommunication company that has nearly half a billion customers in more than 30 countries.
  • Softcat provides a broad spectrum of IT services to businesses. Profits here have risen strongly as the digital revolution has taken off.
  • Games Workshop Group is a giant in the realm of tabletop gaming. Thanks to popular platforms like Warhammer 40,000, it has built a large and loyal fanbase in its 40-plus years of existence.
  • Wise is a recently-IPOed payment gateway that focuses on, not being a bank but providing cost-effective Remittance services. It has a supremely agile business model based on effective money transfers.

Top Growth ETFs

Growth-centric ETFs invest in securities deemed to possess growth characteristics, including those with rapidly growing sales and relatively high price-to-earnings ratios.

For example, the Vanguard Growth ETF, the second largest growth ETF on the market, aims to track the performance of the CRSP US Large Cap Growth Index. This means it focuses on larger companies that are still growing fast, like Amazon. Meanwhile, the Vanguard Small-Cap Growth ETF invests in smaller businesses that are more commonly associated with growth stocks. Invesco QQQ Trust is the largest growth fund by total assets, while iShares Core S&P Mid‑Cap ETF is the third largest one, followed closely by iShares Russell 1000 Growth ETF.

Going further, investors can choose to invest in a specific sector through growth investing funds like Vanguard Information Technology ETF, Health Care Select Sector SPDR Fund, Technology Select Sector SPDR Fund, iShares S&P 500 Growth ETF, or iShares Russel 2000 Growth.

growth etf ishares
Source: CAPEX WebTrader

You can find an ETF to suit any investment strategy you desire by using CAPEX.com WebTrader.

The stocks and ETFs highlighted on this list are sourced from industry analysts, but they may not be a perfect fit for your portfolio. Before you decide to purchase any of these stocks, do plenty of research to ensure they are aligned with your financial goals and risk tolerance.

How to Invest in Growth Stocks

There are two routes to investing in growth stocks: speculating on their prices using derivatives or buying the assets in the hope they increase in value.

Trading growth stocks

With derivatives, you agree to exchange the difference in the price of an asset from when you first open your position to when you close it. You are speculating on the price of the market rather than taking ownership of the stocks. If you open a long position and the stock or ETF does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.

Before you can start, you would need to open a trading account.

Buying growth stocks and growth ETFs

This means that you take ownership of a portion of the company or fund outright, with the intention of holding it with a brokerage and profiting if it increases in value.

Before you can start, you would need to open an investing account with a broker like CAPEX.com.

Get Started with CAPEX.com

Here is how to trade and invest in growth stocks with an international, highly regulated broker like CAPEX.com:

  • Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold growth stocks, open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage, open a CFD trading account.
  • Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
  • Fund your account with fiat money. Before buying and trading any crypto stock, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
  • Select your stocks. We strongly recommend that you thoroughly research the growth stocks that suit your portfolio and risk appetite. Alternatively, investors can buy shares in growth-oriented exchange-traded funds (ETFs).
  • Place a buy order for your chosen stock. Follow the steps required by the trading platform to submit and complete a buy order.

When trading stocks, the contracts are stored in your account and are more liquid than the underlying asset. However, you should be aware that tleveraged trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.

With CAPEX, you can trade on +2.000 stocks and invest in +5.000 stocks and ETFs with ownership.

Is growth investing right for you?

The investment case for growth stocks mostly boils down to one thing: share price appreciation.

  • Growth stocks are focused on growing and this means they are reinvesting any money that they are making;
  • The size and potential of growth stocks mean share prices can be extremely sensitive. One contract or announcement can make or break a company;
  • Although most growth stocks are small or fledging companies, they can also be large market leaders.

Decide whether you want to buy stock or trade stocks. If you invest, then you buy the shares outright and are entitled to any dividends that are paid. If you trade shares, you don’t own them outright, but you can use leverage and speculate in both directions.

Free resources

Before you start investing and trading in growth stocks, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.

Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how leveraged work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.

FAQs

What Is Considered to Be a Growth Stock?

When it comes to equities, "growth" refers to the company's significant potential for capital expansion. These are frequently newer, smaller-cap enterprises, or those operating in expanding industries like biotechnology or technology. Growth stocks sometimes have high P/E ratios despite having low or even negative earnings.

Are Growth Stocks Risky?

There is a basic trade-off between risk and reward, as there is with all investing. Growth stocks have a higher potential for future returns, but they also carry a higher risk than other investing categories like value stocks or corporate bonds. The primary danger is that the actual or anticipated growth stops. Investors overpaid for a product they expected to receive but didn't. A growth stock's price may sharply decline in such circumstances.

What Is an Example of a Growth Stock?

A growth stock would hypothetically be a biotech business that has started developing a potential new cancer therapy. The medication is only in the Phase I stage of clinical trials right now, and it's unclear whether the FDA will give the drug candidate permission to go to the Phase II and III stages. Huge revenues and capital gains could result from the drug's approval and its passing tests. However, all of that R&D money might have been for naught if the medication either doesn't work as intended or has serious negative effects.

How Do You Know If a Stock Is a Growth or Value?

Value stocks are ones that are assumed to trade below their true value and will therefore theoretically deliver a greater return as their stock prices catch up with fundamentals, as opposed to focusing on future growth potential. Value companies often have dividend yields that are greater than average, in contrast to growth equities, which typically do not pay dividends. The opposite of growth companies, value stocks typically have good fundamentals, comparable low price-to-book (P/B) ratios, and low P/E values.

How do you value growth stocks?

Investors determine a growth stock's intrinsic worth and contrast it with the current market price using fundamental analysis and financial statistics. This can assist them in determining the fair value or undervalue of a growing stock.

Growth stocks aren't always a good buy. Avoiding overvalued growth stocks is important because they can lose value until their price matches their fundamentals.

Why do growth stocks underperform when interest rates rise?

Rising interest rates increase the cost of borrowing money for growth stocks to finance their accelerated rise in sales and earnings.

Furthermore, future cash flows lose value when interest rates rise. Therefore, future earnings growth must be discounted at a larger rate when interest rates rise, decreasing their value in terms of current value.

When will growth stocks recover?

Interest rates will continue to rise by the Federal Reserve until American inflation starts to decline. That's poor news for growth stocks, who struggle in a climate with rising rates.

When the Fed succeeds in containing inflation and stops raising interest rates, growth stocks might start to recover. Even still, increasing rates might dim growth stock hopes for years to come.

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