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Growth Stocks: Their Features And Benefits

INTRODUCTION- WHAT ARE GROWTH STOCKS?

Growth stocks offer steady appreciation in returns to their investors. They have the potential to generate high capital gains. They are stocks that belong to companies with a high growth rate and are doing exceptionally well in the market. Generally, you would find them in booming sector companies. E.g., the IT sector, automobile, pharma, and biotech companies. They are companies that generate high profitability in sales. They have a unique business model that makes them top in the list of companies. Their growth performance is better than the average growth market. Hence, if you are an investor who wishes to grow your income rapidly in the next few years, you may consider investing in growth stocks.

To invest in growth stocks, you need to know how to identify them. Growth stocks have certain distinctive features that will help you to identify them in the stock market. These are:

FEATURES OF GROWTH STOCKS: HOW TO KNOW WHICH IS THE BEST GROWTH STOCK?

  • PRICE TO EARNING RATIO (P/E): P/E ratio denotes the price that a share will receive in the market. In simple words, it means how much the investors are ready to pay for the stock. The higher the P/E ratio, the more likely it is to do well. A high P/E ratio is usually considered highly valuable by investors. A high P/E ratio also means that the company is expecting a higher growth rate. Usually, IT sector companies have a high P/E ratio. If you are looking to invest in a growth stock, you must look at the P/E ratio of a company. It is a tool used to ascertain the stock value based on its future or past earnings.

The formula used for calculating the P/E ratio is as follows: 

                         P/E ratio = Market value per share/Earnings per share.

While you need to look at the P/E ratio of a stock, you cannot wholly base your opinion on it. The P/E balance will only tell you how overvalued or undervalued the stock is and if the company is anticipating a future rapid growth in the market. You can get a rough idea of the best growth stock in the market. However, there are several other features that you need to look at along with the P/E ratio to form an opinion.

  • EARNINGS PER SHARE (EPS): EPS denotes the income that every company's share has received.  It is the net profit received on every share. This net profit is calculated after dividing the profit after tax ("PAT") by a total number of shares.

The formula used for calculating the P/E ratio is as follows:

                         EPS = PAT/No. of shares outstanding

If the EPS of a company is increasing, then the stock price is on the rise. You must look at the fall or increase of EPS to ascertain a company's share performance.  If a company's share price is consistently on the rise for the past five years, it means there is considerable growth in the company and its stock. It is a better metric to identify a growth stock.  

  • SALES GROWTH: To identify the best growth stock, you must look at a company's sales growth. If the company is doing exceptionally well in the past few years, it will grow considerable sales. Companies having sales growth every year will have the best growth stock.  Sales are revenue for the company and denote the profitability of the company.
  • RETURN ON EQUITY (ROE):  ROE denotes the annual performance of a company. It is the money made by the company at the end of the year. It represents the returns received on the investments made by its shareholders. It is a helpful metric in understanding the returns you can anticipate on your investment. If the ROE is on the rise, it means the returns are good. It should be more than 15% or higher.

BENEFITS OF INVESTING IN GROWTH STOCKS:

Investing in growth stocks offers you massive returns. If you want to accumulate wealth in the next five years, growth stocks are a suitable investment for you. Investments in growth stocks can be realized in the long term. It is subject to long-term capital gains, which grant tax relief up to Rs. 1 lakh. They are prone to higher risk but offer a higher reward ratio. So, if the company is performing well, you will make huge profits in the future. With growth stocks, you will earn higher returns as compared to the investment made in other stocks. Growth stocks also offer a good chance at diversifying your portfolio if you invest in the best growth stocks of different sector industries.

If you are a first-time investor in growth stock, you can also start investing in a growth mutual fund. That is known as a growth fund. They are a type of mutual fund that supports growth stock and provides higher returns on long-term investment.

CONCLUSION:

Growth stocks usually pay less or zero dividends because they want to grow rapidly by re-investing their earnings. They come with a higher risk. Thus, while identifying the growth stock of a company, you need to look at its key features, its performance, sales, and all other factors associated with it.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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