When it comes to investing, high-growth stocks are particularly appealing. These stocks promise exponential returns and capital appreciation if you seek long-term gains.
But, if you are new to the world of the stock market, picking the right stock and making decisions on whether to hold or sell can be intimidating. This is when you require the help of an expert investment advisory like Research & Ranking to build a robust portfolio.
Continue reading to learn more about high-growth stocks.
What are High-Growth Stocks?
High-growth stocks refer to companies experiencing rapid increases in revenue and earnings compared to their competitors or the overall market. These companies often operate in expanding industries and demonstrate strong potential for future growth.
You may be drawn to high-growth stocks because they have the potential to deliver significant returns over time. These companies often reinvest their earnings (dividends) for further expansion rather than paying it to the investors.
However, high-growth stocks can be volatile, mainly because their valuations are often based on further expectations rather than current performance.
Characteristics of High-Growth Stocks
Ability to scale
Scalability is important for high-growth companies to capitalize on increasing demand. To cater to this demand, high-growth companies ensure that the proportional increase in cost is limited.
High-growth companies increase revenue by leveraging digitalization or expanding operations across geographical borders or markets. These easy-to-scale aspects often translate to higher profit margins and returns on investment.
Part of a growing industry
High-growth stocks operate in sectors with significant market opportunities. These companies may be part of industries that have long-term growth potential. Hence, while identifying high-growth stocks, ensure that they belong to an industry poised for growth at a higher rate than the overall economy is expected to grow.
High revenue
High-growth stocks have fast-expanding revenues. Since these companies may focus on disruptive technology or business models, they will likely experience accelerated growth.
You must look out for companies that have shown remarkable sales, revenue, and earnings growth over consecutive quarters.
Good market share
The company’s market share is the size of its sales vis-a-vis the total sales of its industry. Typically, a high-growth company would have a commendable or at least growing market share. Growing market share means growing revenues. As an investor, look for a stock with steady or rapid revenue to create high profits.
Risks Associated with High-Growth Stocks for Investors
Valuation Concerns
High-growth stocks often trade at high price-to-earning (P/E) ratios or other valuation metrics.
If the company fails to reach growth targets or market conditions change, these high valuations may come under pressure, resulting in a dramatic decline in stock prices.
Execution Risk
Many high-growth companies are in their early stages of development and may face challenges in executing their business plan.
Several issues, like management missteps or operational matters, can jeopardize growth prospects.
Liquidity Risk
Some high-growth stocks can have lower trading volumes, making it difficult to sell or buy large quantities of shares without significantly impacting the stock price. Lack of liquidity can increase the risk of price manipulation.
Cyclical Risk
Some high-growth companies operate in cyclical industries, where demand is closely tied to economic conditions.
During economic downturns, these companies may experience a severe drop in revenue and profitability, which can weigh on their stock prices.
Conclusion
High-growth stocks allow you to enjoy the success of innovative and rapidly expanding businesses. However, it is always essential to do prior research before investing in any stocks.
Using the help of an expert investment advisory firm can help you achieve greater success in the world of stocks. By gaining knowledge and implementing sound investment techniques, you can identify exciting opportunities in this constantly changing market.
