Growth Stock: What Is It And How Do You Spot It?

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Trading apps like SimpleFX aim to help traders profit from the global stock markets. The app allows you to invest cryptocurrencies in top companies and tries to improve your chances of making a profit, despite its high volatility. 

In the long term, many stock prices go up. If you invest in a sound company or a stock index, it is likely that you may lose in the short term if a sell-off happens, just as in spring 2022, but in the long run, you could benefit. 

However, if you are a margin trader and believe the prices will go up, you want to pick the stock that will outperform the market - these are growth stocks. Think of great tech companies disrupting a market, like Tesla or Amazon. Although other companies, for example, those in the commodity business, may outperform growth stocks, like Shell or Alcoa recently, because of the growing price of oil or aluminum, they are instead value companies.

These companies usually don’t pay dividends, but you will gladly trade them for higher growth, especially if you open a long position with leverage. You may sell these stocks to cash in the profits.

What are the typical features of growth stocks?

Future cash flow expectations mainly determine the price of stocks. The growth stocks would expand their sales (and earnings) faster than the market average. That’s why Tesla is the most expensive car company, despite much lower sales and production than the competitors.

If you want to spot a growth company, look for innovative businesses that have a completely unique product or service. Some usual suspects are companies that produce computer hardware, like Apple, Intel, Nvidia, or software companies. 

Another indicator of a potential growth stock is a relatively small market capitalization, which always increases an asset's price volatility. You will find plenty of these companies on Nasdaq.

How to spot a growth company?

The definition is relatively straightforward, but the devil is in the details as many companies pretend to be innovative. The private equity industry, and venture capital investments, are a game between impostors and true innovators.

If you suspect a growth stock, get deeper into their product. Is it innovative? Is it hard for the competitors to come up with a substitute? What are the advantages the company has? Is its unique know-how a barrier for potential copycats? Or maybe their client base and regulatory compliance? 

Another essential characteristic is the growth limit. Is the customer base large enough? Maybe the company is unique only in the local market but faces bigger competitors when expanding abroad?

Look for sectors like technology, fintech, biotech, or blockchain to spot growth stocks. 

Is investing in growth stocks safe?

These are high-risk, high-reward assets. In the short-run, innovative, small-cap companies are more likely to go up or down by double digits. That's the difference between value and growth stocks. 

You can use leverage to increase your profits, but remember that such a move would increase the probability of a margin call if the market goes in the opposite direction.

The great thing about trading apps is that they allow you to take long or short leveraged orders and that you can hedge your positions. For example, if you own some Tesla stock and want to hold them, it’s possible to invest a small amount of money into a short position in case of a temporary downtrend.

When investing in growth stocks, primarily when you use leverage, it’s good to visualize what happens if the market goes against you. Even if you believe in your strategy, did great research, and timed your position perfectly, make sure that you can accept the possible loss.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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