Do you wonder how to find stocks that make the fastest price gains? Do you want to hold growth stocks that have the potential grow year after year for the foreseeable future?
If that’s up your alley, hunting for growth stocks could be a trading or investing style suitable for you.
Read on to find out what’s so exciting about rapidly growing companies, how to locate their stocks, and learn simple but powerful pointers on how to trade them…
Table of Contents
What Is a Growth Stock?
First, let’s make sure you’re clear about exactly what a growth stock is.
When a company grows in size, it can often make larger profits. And these larger profits can often cause the stock to rise in price.
Growth stocks are, for the most part, the stocks of companies that are growing at a quicker rate than other publically traded companies.
These are often newer firms that have created innovative products or found new ways to sell old products. Maybe they’ve created a new technology that the whole world wants, or maybe they just worked out a way to sell a traditional product in an untapped market.
You’ll often find these growth companies in exciting, expanding sectors such as technology, clean energy, marijuana, or whatever business sector is currently ripe for expansion.
As a rule of thumb, growth stocks tend to pay little to no dividends. That can often be because company management reinvests profits back into the company for further growth. So there’s not much left to make dividends payments to current investors.
But for some investors, investing capital in stocks of rapidly growing businesses is more inticing than a dividend. Read on to learn why it can be smart to trade or invest in growth stocks…
Why It Can Be Good to Trade Growth Stocks
Let’s say you’ve finally set up your trading account and saved up a chunk of capital just for trading. Now, you’re looking for the best way to grow that capital.
There’s no shortage of options, right? You could buy blue-chip stocks, like Coca Cola, General Electric, or maybe Ford. These companies have a pretty solid history and will likely be around for a while. And you’ll also likely earn a dividend, as these companies grow at a slow-but-steady rate over time…
But it’s also unlikely that these companies will see rapid growth rates, FOR EXAMPLE, of 50–100% or more per year.
That’s why many traders love growth stocks. These companies can grow FAST — and so can their stock prices.
Even if you’re a short-term trader, trading intraday or holding stocks for a few weeks, growth stocks often have exciting news stories. That can mean volatile price action and amazing trade setups.
In short, trading growth stocks can be about going where the action is and trying to grow your capital at the fastest rate.
What Causes Stock Growth
Now, let’s dig a little deeper … What makes a company grow? What pushes a company’s stock into growth stock territory?
Companies are almost always in business to make a profit. They sell goods or provide services to a segment of the population.
Take Coca-Cola … This company developed a formula for a soda drink that the nearly entire world seems to love and buy. The company became one of the world’s largest companies by finding ways to sell its beverage all over the world, every single day.
Amazon’s another example. The company started in the late 90s as an online book store, at the dawn of internet shopping. On the back of that success, Amazon rode the rising wave of e-commerce. It now sells just about everything under the sun. And its huge infrastructure makes it easy for just about anyone to buy things online.
In both these examples, a company had a product or service that people or businesses wanted, and it found a way to supply it.
But it’s important to note that growth stocks aren’t just the Amazons and Coca-Colas of the world. These aren’t always innovative companies that create something entirely new. In fact, growth companies are often small companies in smaller niches, selling old products in new ways.
It could be an insurance company benefiting from new legislation that makes it mandatory to purchase a certain type of insurance. The company quickly jumps to find as many customers as possible.
Or it could be a business using a new, untapped technology to reach prospective customers, such as selling through Instagram or Facebook.
That’s a rough overview of how and why a company can grow. It’s also key to note that it’s possible for a stock price to grow without a company actually making more profits.
Stock prices can be a reflection of what the market sees for a company’s future. You might find a stock with a booming price, even though the company’s not making great profits. But once the market believes in its future, the company can reach a stage where profits start flowing.
How to Spot Growth Stocks
By now, you might be excited to dive in and start hunting for high-growth companies to trade or invest in.
Finding and trading these growing names takes a requires a solid amount of knowledge and effort, so here’s a list of pointers to help you get started.
Look for Exciting Fundamental Stories and Metrics
A company’s fundamentals are all about the company: what it does, its sales, its cash holdings, and its profits.
Growth stocks can often come with exciting fundamental stories. They might be leaders in their market niche or highly competitive firms in their industry. They may benefit from major outside factors such as new legislation, economic or societal changes, or even just have a new management team focused on expansion.
In terms of looking at the fundamental metrics, good things to watch for are growth in earnings numbers and the consistency of that growth. That’s generally shown in the EPS (earnings per share) metric.
Also note that when looking for growth names, you can often find stocks with a high P/E (price-to-earnings) ratio. That can be due to the fact that the market expects earnings to be much higher in the future due to the company’s growth, so investors are willing to pay higher prices for the stock.
Look for Stocks Trending Upward
At the end of the day in the market, price pays. If you want to grow capital quickly, you want to hold stocks that increase in price.
So look for stocks trending up in price with higher highs and higher lows. You can use momentum technical indicators such as moving averages as a filter to help you find those rising stocks.
Uptrends aren’t the only thing to look for, though. You can also look for stocks breaking out of a trading range or key level on high trading volume. That can signal that the market’s excited about the stock’s future.
Look at Societal Triggers
Societal changes can drive growth for many companies and industries.
Let’s go back to the mid-90s. If as an investor you predicted the internet and e-commerce boom, you might’ve invested in Amazon.
If in the 2000s, you predicted a future global social-media obsession, you might’ve bought shares in Facebook or Twitter.
These kinds of shrewd observations can alert you to amazing growth stock trades. So try to keep an eye on the growing needs and changing lifestyles of modern society…
That’s easier said than done. But try to make it an exercise to notice what excites people.
How StocksToTrade Can Help You Find and Trade Growth Stocks
You’re probably excited to hunt down these growing companies … But where — and how — to get started?
The simplest next step is to set yourself up with the ability to easily locate and research exciting stocks that show future growth potential.
That’s exactly what StocksToTrade is built to do.
StockToTrade is a painstakingly built stock trading and research platform, designed to help individual traders find and trade the best stocks.
The platform can help you with just about all of your trading needs. And if you’re focused on growth stocks, check out these features in particular:
- A powerful stock screener that allows you to quickly scan for all kinds of trading criteria, like fundamentals such as EPS or P/E ratios or your favorite high-potential chart patterns. With just a few clicks, the screener will deliver a list of all the stocks that meet your specific criteria.
- Elegant charting capabilities help you quickly pull up the price action, technical indicators, and place trading alerts on all your favorite stocks. You can quickly see what’s currently happening with each stock.
- The all-seeing news scanner searches high and low for news stories, SEC filings, and even social media mentions of your favorite stocks. Just set the platform for which stocks to watch, and you’ll be alerted to any new hype or buzz almost instantly.
These are just a few of the many powerful features that come built into the trading platform. so grab a 14-day trial of StocksToTrade for just $7 and find out why many of the best traders use our platform each day.
Conclusion
Trading or investing in high-growth names can be exciting and potentially lucrative, but you need to know what you’re doing and what watch for.
Take the time to fully digest the above tips on how to find growth stocks. They may seem simple, but smart trading is about keeping things simple and making informed decisions.
As a final note, make sure you use the best tools to help you cut your learning curve and learn to spot promising growth names as quickly as possible. StocksToTrade can help with that. Try the platform for yourself with a 14-day trial for just $7 now!
Do you focus on growth stocks in your trades? Some people follow price action, and others look for dividend yield. I’d love to know what the readers of this blog focus on — share your thoughts below!