When you are making investing decisions, often you have to look at whether your goals can be best be accomplished with growth stocks, income stocks, value stocks, or other stocks — or a mix. When deciding on your portfolio makeup, it helps to know what to add, and what to sell. One aspect of your portfolio is the inclusion of growth stocks.
Before you invest, though, you should understand what you are investing in. This means that, before you add growth stocks to your portfolio, you need to understand what they are, and their purpose in your investing portfolio.
What are Growth Stocks?
A growth stock is a stock that generates positive cash flow regularly. It is a stock that is expected to grow in stock price as well. When you invest in a growth stock, you are investing in a company whose earnings are expected to continue growing. Often growth stocks pay small dividends or no dividends at all. The idea is to put more money into the company, increasing the capital investment, so that there is more cash, or so that the company can develop more products and create value.
Growth stocks are often classified according to their return on equity (ROE). To find this value, the company’s net income is divided into the average common equity. In order to be considered a growth stock, ROE usually must be at least 15%.
It is important not to confuse a growth stock with a growth company. In some cases, the two can be the same, but in other cases there is a difference. A growth stock is one that looks to see better earnings, and whose growth is expected to be solid and somewhat stable.
A growth company, though, is one that is expanding at a rapid rate, or that has the potential to do so. In some cases, spending to encourage growth can lead to too much debt. Sometimes, a growth company’s stock is actually overvalued. In these cases, a growth company does not make a good growth stock investment.
Using Growth Stocks in Your Portfolio
The point of a growth stock is to help you increase the value of your portfolio. Growth stocks often help improve your portfolios rate of return. In many cases, the capital appreciation with growth stocks exceeds the appreciation seen with value stocks. Growth stocks can help you boost your overall returns over time by increasing the value of your holdings.
More on Investing
Some investing experts, though, caution against building a portfolio entirely comprised of growth stocks. This is because some feel that growth stocks might also be a little more volatile than value stocks. The general feeling is that the bigger the potential for gain, the bigger the potential for loss. You can reduce your risk of loss in your portfolio by tempering some of your growth stocks with value stocks. You can create a solid base for your portfolio, and then add some growth with stocks that are likely to see more capital appreciation.
In many cases, adding growth stocks to your portfolio can potentially help you to improve your performance. Growth stocks can also help you reach your retirement portfolio goals. The key to a successful retirement is beating inflation. Growth stocks can help you reach your goals by potentially helping you achieve growth that exceeds inflation. Inflation erodes your spending power, and growth stocks are often seen as a key part of beating inflation and amassing the capital you require to retire comfortably.
As you consider your options, and set your goals, decide how much growth you need for a successful portfolio. As your goals change, and as you reach different life milestones your strategy might change. You can sell growth stocks at that point, and use the capital gains to purchase income investments that add a little more stability.
Successful investing requires planning. Learn how to incorporate different types of stocks into your portfolio, and you will be more likely to find success.