Everyone invests in stock to make a profit – the vast majority of traders do, in any case. However, for many people just getting started in stocks and shares, it is not always easy to tell which options are likely to do better than others. Of course, one of the best ways to prepare for buying stock is to look carefully at precedents and past performance. However, there are still going to be a few indicators that give you some idea about what to expect.
No one is clairvoyant when it comes to which stocks and shares are likely to make their portfolio boom. Many people make investments in green stocks and socially responsible shares a priority, for example, as society is moving in such a direction. AskTraders certainly has plenty for you to dive into in that respect. However, looking at what society ‘prefers’ is only a very small piece of the bigger puzzle. Let’s take a look at a few tell-tale signs that your prospective investments are likely to do well for you.
Growth stocks are fairly expensive
The best growth stocks available, of course, are those that spike high, and spike fast. This isn’t to say that they are unlikely to be volatile the other way around. However, it is likely to be obvious to many that a firm growth stock will be making big strides in very short spaces of time.
Alongside this trait, of course, is the price. It’s very rare that you will come across a ‘hidden gem’ – in the sense that you happen to find a solid growth stock that’s extremely cheap. The more lucrative and better-performing growth stock, by and large, will be more expensive to buy than your average.
This sounds like a fairly simple point to make, but it’s one of the most important indicators to keep in mind. All investors should be keeping close tabs on their cash flows in general. However, if you notice that a particular stock is spiking in price much higher than its peers, and at a fast pace, then it’s likely that it will be growing significantly in the short term. Long and short – more than a few shrewd investors already know what they are getting into!
Growth rates are pretty broad
One of the first things that all investors should look into when buying new stock is the growth rates and averages. While it’s pretty safe to place money into a stock that has a growth rate of 5%, lowest, year on year, stocks that grow at around 10% (or even as low as 8%) are likely to be going places, fast.
Of course, this is likely to be a secondary factor to the above. Once you have found the price of a potential growth stock, you will probably want to consider its current rate and/or pace of growth. 10% is pretty impressive – and it does indicate that this is an investment that’s going to continue skyrocketing at its current trajectory.
Check the dividends
Yes, dividends can be very useful, and many investors look for their availability – but a stock with little to no dividend payouts will likely keep on growing. Therefore, if you are interested in growth stocks, it is worth considering whether or not you are going to be willing to sacrifice your dividend potential on route.
High growth stocks will likely do away with dividends altogether for a very simple reason. Instead of eschewing cash regularly to shareholders, they can simply keep pumping money into their growth. This occurs with the understanding of shareholders that, in time, they can expect even bigger wins if they are willing to hold off on dividends.
This is where many traders will likely part ways. Some will prefer to hold onto their dividend-friendly approach to maximize the small wins, while others will risk it all and see a stock through on its growth under this proviso.
Share prices are historically higher – in correlation – than most
Another simple figure to consider when identifying growth stocks is, of course, share pricing. Share price correlations will generally tell you how a stock or company is performing over the long term. However, it’s also a key indicator for spotting stocks that are likely to grow exponentially for years to come.
Looking at the past performance of a share price, if you notice considerable spikes or a long route upwards, then you are very likely to be getting involved in a high growth stock. Keep in mind that the longer the upward run, the more likely this is to be the case.
Of course, it does not always follow. There are some growth stocks that can and will plateau, and others that will hit a downslide depending on a variety of different factors.
Is it worth hunting down growth stocks?
On paper, it might seem as though all investors will likely want to get behind growth stocks. However, as with all market purchases, there are risks involved. Even if a stock has all the hallmarks of the above, there’s no guarantee that it won’t avoid volatility and start plummeting in future. There is, regrettably, no such thing as a ‘sure’ scenario here.
Growth stocks can, on occasion, fall harder than average stocks depending on what is causing the drop. Major reputation damage or political concerns, for example, are likely to cause growth stocks to fall from grace fairly hard. That’s because it may be hard for shareholders to justify the expensive prices they normally retail at on the markets.
Smaller stocks and those with steadier growth credentials are likely to recover or plateau quicker, simply because they have less distance to fall. Ultimately, it is all about investing in a stock that is going to weather storms, not just keep growing and then crash and burn when things go slightly awry.
As with all stocks, growth options can be lucrative – but you need to be very careful about where you put your money. Can you really afford to follow a growth stock right to the peak – and then prepare for the fall?