How to Invest in High Growth Stocks
If you want to invest in high-growth stocks, use this guide as your starting point.
High-growth stocks can provide significant rewards, but investing in them takes careful analysis and study. Finding companies with solid growth prospects isn't always easy, so it's important to do your homework before buying shares.
Look at the company's growth potential
Your first step is to look at the company's overall growth potential. The best way to do this is to focus on a few key areas:
- Financial statements. You can find these on the company's investor relations website or by requesting them from your broker. Look at sales, gross margins, net income and cash flow over time to get an idea of how well the company has performed in the past.
- Business model. A business model describes how a company makes money by selling products or services and keeping customers happy. If you're unsure what business model your target companies have (for example, if they offer both subscriptions and one-time purchases), think about which type would benefit most from high-growth opportunities like AI or blockchain technology. After this, see if it fits with their current offerings and their projected plans for expansion into new markets overseas. This should help identify what products will be most profitable over time — and thus how successful each firm may become.
Invest in a high-growth industry
A company's growth rate can be calculated using its earnings per share (EPS). The rate is expressed as a percent change from one period to the next, such as a year or quarter. For example, if a stock has an EPS of $1 this quarter and $1.25 the next, that's a 25% increase in EPS.
The industry you're looking at should also have high growth potential. Generally speaking, industries where products don't become obsolete quickly tend to have more consistent sales and profits than those where products quickly become outdated (think newspapers vs. smartphones). You also want to ensure enough customers in your chosen industry; otherwise, too many companies will compete for limited business opportunities and drive down profit margins across the board.
The best way to determine whether an industry is growing fast enough for you is by comparing its growth rate with other comparable industries or with itself over time. It doesn't hurt if its current year looks strong compared to past years' performance.
Understand the company's financial health and stability
To get a feel for a company's financial health, you'll want to look at its balance sheet, cash flow statement, income statement, debt load and share price.
- Balance Sheet. The balance sheet is an accounting record that shows a business's assets (what it owns), liabilities (what it owes) and net worth at any given time.
- Cash Flow. The cash flow statement reveals how much money was generated by operations in a given period and how much was spent on investing or financing activities during that time.
- Income statement. The income statement tracks revenue generated during some specified period. It subtracts costs like advertising fees paid to generate those sales figures and then either subtracts or adds taxes due based on whether profits were made from investing activities such as selling stocks/bonds/commodities. It then divides all these numbers into their respective profit margins achieved before taxes have been applied to determine whether extra funds are left over after paying for overhead expenses like salaries.
Analyze the company's management
You should also analyze the company's management. This includes looking at the management team's experience, skill sets and track performance record. You'll also want to look at how financially healthy a company is and how corporate culture and governance are handled.
Assess the risk
Risk tolerance is a personal thing. It can change over time, and it's not the same as risk aversion or risk appetite. If you're new to investing, there are some easy ways to gauge your risk tolerance:
- Take a look at your investment portfolio and see what percentage of it is in stocks (as opposed to bonds or cash), then consider how comfortable that makes you feel. If most of your savings are tied up in CDs, checking accounts and other safe investments, then you may be more hesitant than someone with plenty of room for growth in their portfolio — even if they feel more comfortable taking on investment risk.
- Think back over past experiences when life has thrown you curveballs like job losses or medical bills — how did those situations affect how well-off you were financially? If it was relatively easy to bounce back from these setbacks because they were manageable financially (and didn't take out too much of what savings had built up), then chances are good that investing isn't going to give anyone sleepless nights either!
High-growth stocks can provide big rewards but also carry more risk and volatility. To succeed with high-growth stocks, you'll need to do significant research and plan how to use them in your portfolio.
Some of the best investments can deliver double-digit gains in a short time and often within just months or even weeks after purchase. These returns may sound tempting, but investors who want to experience those results should know that high-growth stocks are more volatile than other investments like bonds or money market accounts. That's because high-growth stocks typically pay higher dividends than other investment vehicles; these payments are based on the company's revenue growth rather than its profits from previous years (which is how most bondholders get paid).
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