Make money with Growth Stock Investing

Growth stock investing is where the investor puts his or her money into growth stocks. Growth stocks are stocks that are growing at a faster than average rate relative to the market. These stocks often have a high price to earnings ratio (P/E Ratio). These companies usually do not pay a dividend to the shareholders as ploughing the profits back into the company is seen as a more lucrative option.

High Risk

Investing in rapidly growing companies can be high risk, as high growth stocks tend to be more volatile than companies that are no longer growing significantly.

However, if the company you invest in continues to grow rapidly, the returns on your investment can be also be very high.

Let’s use google as an example as you have almost certainly heard of them. You may even have found this site through them!

google stock price

In 2004 when google floated on the stock market, they were very much seen as a growth company. If you had bought google shares around the $100 mark in August 2004, by late 2007 they would have worth around $700, a massive increase.

However, after hitting the $700 mark they did fall rapidly, largely due to the global credit crisis that occurred afterwards.

At the time of writing google had a relatively high Price/Earnings ratio of close to 30 and has not paid a dividend. More financial information on Google can be found at google finance.

Remember the high growth stocks of the 1990s?

Many of the tech companies that were fueling the tech bubble were high growth stocks. Many tech stocks including Yahoo and Microsoft became massively overpriced in this period. The NASDAQ which is a very tech heavy index rose to 5048 points in the year 2000, but subsequently fell to 1139 by September 2002.

nasdaq chart

Even today, many years later the index is still nowhere near where it was at that 2000 high and may not return there for many years, possibly decades. This highlights the potential risks involved with growth stocks.

Conclusion

Growth stock investing can be very profitable, especially if the growth company continues to grow at a fast pace. However, as mentioned above, growth companies can become massively overvalued and when this occurs the market will usually correct itself to reflect the underlying fundamentals of the company