Investing in growth stocks: how to find growth stocks
Investing in growth stocks can be a great way to make a life-changing fortune in the stock market. Success, of course, lies in knowing which growth stocks to buy and when.
What are growth stocks?
Growth stocks are companies that grow their revenues and profits faster than the average business in their industry or the market as a whole.
A growing company often develops an innovative product or service that gains share in existing markets, expands into new markets, or even creates entirely new industries.
Companies that can grow faster than average over a long period of time tend to be rewarded by the market while generating significant returns for shareholders. And the faster they grow, the more profit can be.
Unlike value stocks, growth stocks tend to be more expensive than average stocks in terms of metrics such as price-to-earnings, price to sales, and price to free cash flow. Yet despite the high prices, the best-performing stocks can generate huge returns for investors as they realize their enormous upside potential.
How to find growth stocks
To find high growth stocks, you need:
Identifying strong long-term market trends and the companies that can best profit from them.
Narrow your list down to businesses with strong competitive advantages.
Identify trends and companies that drive them
Companies that can benefit from strong long-term trends can increase their sales and profits over the years, while creating wealth for their shareholders along the way. These trends and companies that can help you profit from them.
The main thing is to try to invest in such trends and companies as early as possible. The earlier you enter, the more profit you will receive. However, the strongest trends can last for many years or even decades, which gives you enough time.
Bet on companies with competitive advantages
It is also important to invest in growing companies with strong competitive advantages. Otherwise, their competitors may outrun them, and their growth may not last long.
Network effects. Facebook is a prime example here. Every person who joins his social media platform makes it more valuable to other members. Network effects can make it difficult for new entrants to oust the current market share leader, and Facebook's more than 2 billion users certainly makes it unlikely that a new social media company will supplant it.
Benefits of Scaling: Size can be another important benefit. Amazon is a great example here, as its huge global fulfillment network is something that its smaller competitors will be extremely difficult to replicate.