What exactly are growth stocks? How do they differ from other types of stocks?

Growth stocks are the main type of stock I personally invest in. Within this article I will explore what exactly is meant by a 'Growth' stock and why I like them. I will also discuss there negatives as they are not suited for everyone. I will lastly showcase some examples of growth stocks that I currently like the look of.

What is a Growth Stock?

A growth stock is an investment that has been selected because its price will increase over time due to the company’s ability to grow profits aka. growth companies. This means that the company is able to generate revenue at a faster rate than the cost of doing business compared to the broader market. Typically growth stocks will be more volatile than the broader market but as the saying goes, high risk high reward... high losses may also occur however.

Typically growth stocks do not pay dividends as their earnings come from growing revenues rather than receiving money from investors via distributions. Growth stocks often have a lot of room to grow due to being younger or less established business and hence can not afford to pay out their revenue as dividends; all revenue will usually go straight into accelerating a companies growth.

Many growth stocks are also in a position where they are losing money every quarter due to being at a stage before there revenue exceeds their expenses. This is another factor of why many people dislike growth stocks. However if you are looking for a long term investment then these stocks can be great for massive long term gains.

If you pick good companies in the stock market with a lot of room to grow then in 10-15 years time when they are fully established and making a lot of profit then the share price can increase drastically. They also at this larger scale may then decide to pay dividends.

There are many growth investing strategies available and there are also many growth stocks available on the stock market.

Growth Stocks vs Dividend Stocks

People often get confused and think that dividend growth stocks are growth stocks as we have just mentioned that also pay dividends however this is not the case. Dividend growth stocks are stocks that have consistently increased there dividend value over the long term.

The difference between growth stocks and dividend stocks is that growth stocks are typically much younger businesses whereas dividend stocks are older businesses that have already generated a large amount of cash flow and have decided to distribute it back to shareholders through dividends.

Dividends are paid out on a regular basis and are considered safe investments as they are guaranteed to keep increasing each year. As a result they tend to be lower risk than growth stocks which are only guaranteed to increase over time.

Growth Stocks vs Value Stocks

Value stocks are stocks that are priced low compared to the current market value of the company. These stocks are typically cheaper to buy than growth stocks as they are generally less well known and therefore harder to find. The reason why value stocks are so cheap is because they are selling at a discount to what the current market thinks they are worth.

As a result value stocks are usually very risky as the market could change dramatically in the short term. If the market does drop then the value of the shares will fall even further and make them even cheaper.

However if the market rises then the shares will rise too and become more expensive meaning that they will no longer be undervalued. In addition to this the dividends received by value stocks are usually higher than those received by growth stocks.

Growth Stocks I Like

The stocks I list here are stocks I like however this is based of my own opinions and analysis. For any financial advise, contact a qualified professional such as an accountant or financial advisor.

Tesla

This is one of my favourite stocks and is the largest in my portfolio. It was founded in 2003 and started off as a manufacturer of electric cars but now manufactures everything from solar panels to batteries. They also work in the field of artificial intelligence and self driving vehicles.

Tesla is rapidly growing deliveries of its Model 3 and Y car while tying to keep up with demand even in such an unforgiving market. While most other vehicle makers are having declining production and delivery numbers due to chip shortages and global supply shortages, Tesla has managed to increase production about 69% year over year in Q1 2022 from Q1 2021.

Tesla aims to release a range of vehicles next year (2023) ranging from their Cybertruck to there more recently announced (but already expected) dedicated robotaxi for when their FSD (Full Self Driving) software suite is complete. 

Tesla could have a full blog to keep up with the amount of stuff they are working on and I urge anyone who is sceptical to really research and dig deep into Tesla's potential... it's mind boggling!

BioNano Genomics

Another one of my favourite stocks which has been beat down in the recent market is Bionano Genomics ($BNGO). Bionano genomics is a biotech company focused on developing DNA sequencing technology. Their main product is called the Sapphyr system which is designed to sequence genomes in hours rather than days optically.

Bionano genomics is an example of a company that is currently not in the stage where they are generating profits however, there outlook based on the projections indicate that this company could be valued much higher than todays values.

Virgin Galactic

I am a huge fan of Richard Branson and his space travel company Virgin Galactic. This company is trying to develop commercial space flight services and hopes to launch tourists into suborbital space flights within the next decade.

Richard Branson has stated that he wants to fly people to space for $450,000 per seat, this would mean that you can go to space for just a fraction of a cost of what it would be with another provider such as Blue Origin.

Virgin galactic plans to start commercial operations in Q1 2023 pushed back from Q4 2022 which is a small negative however as I mentioned, the time horizon for growth stocks tends to be long term. For me, that's a minimum of 5 years so I delay of one quarter doesn't drastically impact my overall outlook of the company. 

Virgin Galactic currently has great demand with years worth of ticket reservations for their flights. The only bottleneck at the moment is how many ships can be built for flights to space as fast as possible. Of course, with safety being the number one priority. Any accidents that occur could negatively impact the company.

Beyond Meat

Beyond Meat is another growth stock example. Beyond meat is becoming very popular as a plant-based alternative to meat products. It was founded by Ethan Brown in 2009. He started selling the first plant-based burger in 2010. 

Beyond meat is a company I am personally currently interested in however do not have a position open yet as I feel I need to do some more research before being comfortable investing. However, there often seems to be good signs for the company that I am starting to see in person. For example, I live in the UK and have recently started seeing Beyond Meat picking up traction over here as more and more people seem to enjoy it.

Summary

Overall, I think the growth stocks listed above are all companies that I believe will continue to grow and become even bigger in the future. These are companies that I believe will make a big difference to our lives and society in the long term. This list is just a tiny example of the growth stocks available at the moment and I imagine there are many hidden gems waiting to be discovered which would yield massive growth.

I hope you have enjoyed this blog post. If you did , please share on social media and leave us a comment down below.

Thanks for reading 😀

FAQ

What Is a Growth Stock?

A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they eventually sell their shares in the future.

Source: (investopedia.com)

How Do You Know If a Stock Is Growth or Value?

Instead of looking to future growth potential, value stocks are those that are thought to trade below what they are really worth and will thus theoretically provide a superior return as their stock prices catch up with fundamentals. Unlike growth stocks, which typically do not pay dividends, value stocks often have higher than average dividend yields. Value stocks also tend to have strong fundamentals with comparably low price-to-book (P/B) ratios and low P/E values—the opposite of growth stocks.

Source: (investopedia.com)