A growth stock is a term used in the context of investing in stock markets. Growth stocks are stocks of those companies that have a lot of potential to grow and get bigger in the future. These companies are often doing something new or different that could make them very successful and hence offer handsome returns to the shareholders. In order to get a better idea about this concept one should look at some of the advantages and disadvantages of growth stocks –
Advantages of Growth Stocks
High Return on Investment
The first and foremost advantage of a growth stock is that they offer the investors a potential for high returns because growth stock companies are typically in the early stages of their growth, so they have more room for expansion and are more likely to generate high revenue growth rates as compared to those companies which are already in the maturity stage of industry cycle and hence are unattractive as far as returns on investment is concerned.
Diversification Angel
Diversification is the key component of any investment, diversification in simple words is the practice of spreading investments across different asset classes and in the case of stock markets if an investor has only dividend-paying stocks in his or her portfolio then investor will get only constant return but chances of him or her getting abnormal returns will be low due to absence of growth stocks in the portfolio.
Future of Growth Stocks
Growth stocks often belong to companies that are innovative and disruptive, introducing new technologies, products, or services that can change entire industries. Hence one can say that growth stocks belong to the future and as far as investors are concerned especially the younger ones they will always look to invest in such stocks are the future of human civilizations rather than investing in traditional businesses.
Disadvantages of Growth Stocks
Volatility of Growth Stocks
The biggest disadvantage of growth stocks is that they are highly volatile in the sense that they can be up 50 percent in one month and then 50 percent down the next month, unlike other stocks which do not fluctuate that much. Hence in simple words, if you are a conservative investor then you should avoid growth stocks as growth stocks can give you sleepless nights to an investor due to the inherent volatility of growth stocks.
Lack of Dividends
Growth stocks are of companies that are growing and companies that are growing will never pay significant dividends because they would rather invest that amount in the business so as to generate even higher returns for the investor. Hence this can be a limiting factor as the majority of investors love to have constant income in the form of dividends and hence such investors will never invest in growth stock no matter how much return they offer as in the eyes of such investors a bird in hand is better than two in the bush.
Not all Companies are Good
Another problem with growth stocks is that the success rate of investing in growth stock is very low as not all growth companies will be a success story rather in the majority of cases investors have to face loss and hence it is important for an investor to pick the right stock rather than picking any stock thinking of it to be a good stock for investment. In simple words picking growth stock is not like playing a game of musical chair rather it should be picked like one is playing a game of chess after careful thought and consideration.
As one can see from the above that growth stocks have pros as well as cons and that is why an investor should carefully read the above points and then only should invest in the growth stock although these stocks can give handsome returns at the same time they are filled with danger and if you are not careful enough then it can lead to big losses as far as investors are concerned.