How To Find Growth Stocks

A growth stock is a type of stock that grows faster than other stocks in the stock market. This means it performs better in categories such as sales and earnings.

Value stocks are stocks that are priced lower than the value of the company and its assets. Value stocks can be identified by looking at financial and price-to-earning ratios.

When investing in the stock market, whether you chose to invest in growth or value stocks really depends on what sort of an investment you would like to make.

Growth stocks tend to perform better in the near future, whereas value stocks tend to perform better in the long run and are considered to carry less risk.

However, it is possible to invest in both types of stocks when doing stock market investing.

The key point is to make sure that whatever you invest in, you have done adequate research beforehand to ensure you are making the best investment decision.

This way, regardless of the stocks you invest in, your experience in the stock market will be a positive rather than negative one.

In this article we shall concentrate on choosing growth stocks, as they tend to carry the most risk especially if you don’t know what you are doing.

So use the following guidelines given in the rest of this article to help you find the right growth stocks to invest in.

Comparisons In The Stock Market

In the stock market in order to determine how well a stock is doing you need something to compare it against.

One way you can do this is to compare the growth of a company with other companies in the same industry, or even with the stock market itself.

This should then tell you whether the stock you are looking at is indeed a growth stock or not.

For example, if a company has had an earnings growth of at least 15% per year over the last three years and the market average has been 10%, then those stocks would qualify as growth stocks.

Stock Market Fundamentals

In stock market investing, “fundamentals” basically refers to a company’s financial standing.

An investor who does fundamental analysis would therefore look at things such as a company’s balance sheet, income and cash flow.

As a stock market investor, you should pay attention to three main areas when selecting potential growth stocks to invest in.

1 – Sales

As a general rule, look for companies that have on average experienced around a 10% increase in sales over the past few years.

2 – Earnings

Look for earnings that have increased at least 10% since the previous year. This will usually reflect an increase in sales.

3 – Debt

Never invest in a company that is overburden with debt, because there is a good chance that it may not exist in its present form in the future.

Stock Market Leaders & Megatrends

If you study the history of the stock market there is one thing you will notice that occurs on a consistent basis.

Strong companies that are in a growing industry usually end up performing very well in terms of the value of their stocks. One way to identify such companies is to spot megatrends.

A megatrend is a major development that will have a significant long term impact on society.

A past example of this is the creation of the Internet, which has completely changed the way most people go about their everyday lives.

A developing example of a megatrend is the rapidly aging population of westernised countries, which will result in more and more elderly people living longer into their retirement years.

As a stock market investor, you need to be constantly on the lookout for such trends and then try to invest in those stocks as soon as you can.

Company Niche

A company which has established a strong niche is likely to perform well in the stock market. Look out for companies which display the following the following characteristics:

1 – Strong Brand Name

A strong brand name would be something like Coca-Cola or Microsoft. These are brands people identify with and trust, which makes it harder for competitors with similar products to take away from their success.

2 – Barriers To Entry

Barriers to entry prevent, or make it difficult, for other companies to enter that niche. An example of this would be water or electric companies.

3 – Research And Development

Companies such as Pfizer or Merck who spend a lot of money on research and development are likely to experience positive growth in the future, because this research translates into the development of new products which people will eventually buy.

Growth Stocks, Buyers & Sellers

What makes a stock go up in value in the stock market is demand. If more people want to buy a stock than sell it, the value of that stock will increase. If more people are selling a stock than buying it, its value will decrease.

Some of the things which affect whether people buy or sell stocks are institutional buying (mutual funds and pension plans who are buying up stock), stock market analyst recommendations and recommendations from newsletters and financial publications.

Stock Market History

To indentify growth stocks you need to look into the history of a company.

This includes looking at the fundamentals, whether a company is in a growth industry and monitoring the future performance of your stocks to ensure that they are still growing.