How to Invest in Growth Stocks

How to Invest in Growth Stocks

Don't you wish you'd bought a few shares of Amazon stock back in the late 90s? If you'd invested a mere $100 after the company's IPO (initial public offering) in 1997, you'd have over $100,000 in 2020.[1] X Research source This is the appeal of growth stocks—find a company that's capable of generating revenue far faster than the industry average and watch your own portfolio value soar.[2] X Research source While betting it all on an individual stock is quite risky and requires a better-than-average understanding of the underlying market and industry, even beginning investors can get in on the growth-stock action with exchange-traded funds (ETFs).

Method 1 of 2:
Using an ETF

1
Look up ETFs available through your online broker. As the name implies, shares in exchange-traded funds are bought and sold just like regular stocks, so most online brokers have them listed. Use your online broker's tools to find growth ETFs that capture your interest. [3] X Research source When you buy ETF shares, you're buying an interest in a basket of underlying securities, many of which you wouldn't be able to buy on your own. This enables you to invest in more expensive growth stocks while still staying within your investment budget. Growth ETFs are typically labeled as such. There are large-cap funds, which include shares in large, well-established companies, such as Microsoft and Apple. Small-cap funds, on the other hand, are full of securities from start-ups and smaller firms that have yet to make it big (and are therefore usually riskier).
2
Evaluate the underlying securities in growth ETFs. Fund holdings are carefully curated by professional managers, but this doesn't mean they're without risk. Growth securities in particular tend to be more volatile, so they carry more risk for you as an investor. Do your homework to make sure you're comfortable putting your money into the fund. [4] X Research source Your online broker has resources you can use to pore through the annual reports and other financial information for the companies included in the fund's holdings. Since you're looking for growth stocks, pay attention to growth projections and forecasts, which give you an idea of where the company's going.
3
Read up on trends in the underlying sector or industry. While ETFs are generally a more conservative investment, growth ETFs are naturally more volatile because they consist primarily of growth stocks. A solid understanding of what's going on in the underlying sector or industry is vital to investing wisely. [5] X Research source For example, if you're looking at tech stocks, the most growth is likely to be in cloud computing, streaming entertainment, and digital advertising.[6] X Research source
4
Buy ETF shares the same way you would buy shares of stock. Once you've decided which ETFs you want to buy, ordering shares is just as easy as placing an order for any other shares of stock. You can choose to buy as many shares as you can get for a certain amount of money or specify the amount you're willing to pay per share. Your broker will execute the trade and put the shares in your portfolio. [7] X Research source With growth ETFs, keep in mind that the underlying volatility could result in drastic price changes. If you're trying to buy shares at a specific price, it might take a few days to execute the trade. Likewise, if you buy as many shares as you can at market price, the market price might end up being drastically different from what you initially looked at.
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Method 2 of 2:
Finding Individual Growth Stocks

1
Read financial news for companies that consistently outperform their competitors. If there's a real standout in the industry, it'll likely be the talk of all major financial news outlets. Noting which companies are all the buzz gives you a leg up on potential growth stocks. [8] X Research source Keep in mind that if the company's already in the news, this means the growth has already started and you might not catch the rock-bottom prices. In addition to the individual company's growth, pay attention to the overall health of the industry. Too many competitors could signal an imminent burst (think the "dotcom bubble" of the late 90s) and massive losses.[9] X Research source
2
Keep up with industry trends and companies that capitalize on them. Companies that are poised to jump onto trends and take the lead are most likely to grow. Focus on deep trends that are likely to keep growing themselves, such as the cloud computing trend in the tech industry. [10] X Research source If there's something in the particular industry that everyone seems to be talking about, look at the companies that started doing that thing before it became a trend. Those are the ones that are most likely to be able to keep carrying the trend forward. Look at disruptors in light of the present industry. Does the change the disruptor company is bringing forward seem likely to bring about a permanent shift in the industry, or is it a flash in the pan? If the change has legs, that company will have an advantage as others in the industry struggle to catch up.
3
Evaluate the company's competitive advantage. A competitive advantage over other companies in the industry can keep a growth leader ahead of the pack with room to grow. Size and network advantages (think Amazon and Facebook) are important here because a large company with an expansive network has the power to gobble up any company that becomes a threat. [11] X Research source Keep an eye out for disruptors—companies that have the potential to flip their industry on its head. Think about what Airbnb did to the hospitality industry, or how Uber and Lyft disrupted the taxi industry. When these companies succeed, they have huge growth potential.
4
Choose companies with large, untapped markets. If a company has a large market that it hasn't completely reached yet, that means it has a lot of room to grow. Use industry reports from firms like Gartner and eMarketer to get market share and growth projections for potential growth stocks. [12] X Research source While small, niche companies can also grow, you can't expect their growth to be long-term. Companies with the capability of eventually expanding globally have the potential for extraordinary long-term growth. Look at what the company offers and imagine it becoming, essentially, a utility. Will people 10 years from now be wondering what they ever did without that company and its services? That's a growth stock you want to buy early for potentially big returns.
5
Check the company's annual reports for growth spending. If a company is diverting a substantial portion of its profits towards research and development, that could indicate that it's about to spring something big. If there's room for the company to grow and the company is capitalizing on that, it could signal that the stock is about to rise. [13] X Research source This kind of spending often pushes the price of the stock itself down, so it can be a bargain—especially if all signs point towards significant future growth.
6
Buy into growth stocks slowly. When a stock captures your interest and you think it's poised to move, your instinct might be to jump in with both feet. Don't follow your instinct. Start slow, investing only part of the money you have allocated for growth stocks in your portfolio. If you're right, you can always add more. If you're wrong, you won't lose as much. [14] X Research source For example, if you have $10,000 to invest, you might start by investing half of that money, or $5,000. If and when the stock goes up 2-3%, spend half of the remaining $5,000. Repeat this process until you're 100% invested.
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Method 1 of 2:
Using an ETF

1
Look up ETFs available through your online broker. As the name implies, shares in exchange-traded funds are bought and sold just like regular stocks, so most online brokers have them listed. Use your online broker's tools to find growth ETFs that capture your interest. [3] X Research source When you buy ETF shares, you're buying an interest in a basket of underlying securities, many of which you wouldn't be able to buy on your own. This enables you to invest in more expensive growth stocks while still staying within your investment budget. Growth ETFs are typically labeled as such. There are large-cap funds, which include shares in large, well-established companies, such as Microsoft and Apple. Small-cap funds, on the other hand, are full of securities from start-ups and smaller firms that have yet to make it big (and are therefore usually riskier).
2
Evaluate the underlying securities in growth ETFs. Fund holdings are carefully curated by professional managers, but this doesn't mean they're without risk. Growth securities in particular tend to be more volatile, so they carry more risk for you as an investor. Do your homework to make sure you're comfortable putting your money into the fund. [4] X Research source Your online broker has resources you can use to pore through the annual reports and other financial information for the companies included in the fund's holdings. Since you're looking for growth stocks, pay attention to growth projections and forecasts, which give you an idea of where the company's going.
3
Read up on trends in the underlying sector or industry. While ETFs are generally a more conservative investment, growth ETFs are naturally more volatile because they consist primarily of growth stocks. A solid understanding of what's going on in the underlying sector or industry is vital to investing wisely. [5] X Research source For example, if you're looking at tech stocks, the most growth is likely to be in cloud computing, streaming entertainment, and digital advertising.[6] X Research source
4
Buy ETF shares the same way you would buy shares of stock. Once you've decided which ETFs you want to buy, ordering shares is just as easy as placing an order for any other shares of stock. You can choose to buy as many shares as you can get for a certain amount of money or specify the amount you're willing to pay per share. Your broker will execute the trade and put the shares in your portfolio. [7] X Research source With growth ETFs, keep in mind that the underlying volatility could result in drastic price changes. If you're trying to buy shares at a specific price, it might take a few days to execute the trade. Likewise, if you buy as many shares as you can at market price, the market price might end up being drastically different from what you initially looked at.
Advertisement

Method 2 of 2:
Finding Individual Growth Stocks

1
Read financial news for companies that consistently outperform their competitors. If there's a real standout in the industry, it'll likely be the talk of all major financial news outlets. Noting which companies are all the buzz gives you a leg up on potential growth stocks. [8] X Research source Keep in mind that if the company's already in the news, this means the growth has already started and you might not catch the rock-bottom prices. In addition to the individual company's growth, pay attention to the overall health of the industry. Too many competitors could signal an imminent burst (think the "dotcom bubble" of the late 90s) and massive losses.[9] X Research source
2
Keep up with industry trends and companies that capitalize on them. Companies that are poised to jump onto trends and take the lead are most likely to grow. Focus on deep trends that are likely to keep growing themselves, such as the cloud computing trend in the tech industry. [10] X Research source If there's something in the particular industry that everyone seems to be talking about, look at the companies that started doing that thing before it became a trend. Those are the ones that are most likely to be able to keep carrying the trend forward. Look at disruptors in light of the present industry. Does the change the disruptor company is bringing forward seem likely to bring about a permanent shift in the industry, or is it a flash in the pan? If the change has legs, that company will have an advantage as others in the industry struggle to catch up.
3
Evaluate the company's competitive advantage. A competitive advantage over other companies in the industry can keep a growth leader ahead of the pack with room to grow. Size and network advantages (think Amazon and Facebook) are important here because a large company with an expansive network has the power to gobble up any company that becomes a threat. [11] X Research source Keep an eye out for disruptors—companies that have the potential to flip their industry on its head. Think about what Airbnb did to the hospitality industry, or how Uber and Lyft disrupted the taxi industry. When these companies succeed, they have huge growth potential.
4
Choose companies with large, untapped markets. If a company has a large market that it hasn't completely reached yet, that means it has a lot of room to grow. Use industry reports from firms like Gartner and eMarketer to get market share and growth projections for potential growth stocks. [12] X Research source While small, niche companies can also grow, you can't expect their growth to be long-term. Companies with the capability of eventually expanding globally have the potential for extraordinary long-term growth. Look at what the company offers and imagine it becoming, essentially, a utility. Will people 10 years from now be wondering what they ever did without that company and its services? That's a growth stock you want to buy early for potentially big returns.
5
Check the company's annual reports for growth spending. If a company is diverting a substantial portion of its profits towards research and development, that could indicate that it's about to spring something big. If there's room for the company to grow and the company is capitalizing on that, it could signal that the stock is about to rise. [13] X Research source This kind of spending often pushes the price of the stock itself down, so it can be a bargain—especially if all signs point towards significant future growth.
6
Buy into growth stocks slowly. When a stock captures your interest and you think it's poised to move, your instinct might be to jump in with both feet. Don't follow your instinct. Start slow, investing only part of the money you have allocated for growth stocks in your portfolio. If you're right, you can always add more. If you're wrong, you won't lose as much. [14] X Research source For example, if you have $10,000 to invest, you might start by investing half of that money, or $5,000. If and when the stock goes up 2-3%, spend half of the remaining $5,000. Repeat this process until you're 100% invested.
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