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Investors today prefer stock market strategies focused on capital appreciation, with one of the primary objectives being the potential rise in stock prices. Growth stocks, typically from companies in the early stages, are sought after for their anticipated future growth potential. However, investing in growth stocks carries risks, as their prices can be highly volatile and may not offer dividends. Assessing factors like high price to earnings ratios is crucial before investing, and utilising tools like a brokerage calculator can aid one in making informed decisions aligned with the investment goals and risk tolerance.
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Understanding Growth Stocks
Growth stocks are characterised by consistent market growth of at least 15% over recent years, typically attributed to factors like unique products, innovative business plans, or patents. As these companies develop and expand their market share over time, their stock prices tend to rise accordingly. For instance, technology firms in the late 1920s witnessed substantial growth, reflecting positively on their stock prices.
Features of Growth Stock
- Consistent market growth of at least 15% over recent years
- Typically associated with unique products, innovative business plans, or patents
- Often experience an increase in annual revenue due to market demand or technological advancements
- Tend to hold a significant market share or possess valuable intellectual property
- Share prices reflect the company’s growth trajectory and potential for future expansion
Reason to Invest in Growth Stocks
- Investing in growth stocks offers a smart way to utilise savings and accumulate future returns, enhancing the financial portfolio.
- Profit and loss are common in growth stock investing, with capital gains subject to long term capital gain tax, typically lower than short term tax rates.
- Growth stocks aim to outperform inflation in a growing economy, potentially providing significant returns.
Risk Associate with Growth Stocks
- Investing in growth stocks carries a higher risk due to the potential for significant losses alongside potential profits, given the higher profit prices associated with these stocks.
- There is uncertainty regarding the profitability of growth companies over the long term, as their success is contingent on sustained growth and market demand.
- Growth stocks typically do not offer dividends or provide low dividends, which can impact potential returns for investors, adding to the risk associated with holding them.
Method to Invest in Growth Stocks
Investing in growth stocks requires a good understanding of the stock market and investment principles.
- To begin investing, one must first open a Demat and trading account with a stockbroker such as Share India, which offers free account openings.
- The process of opening a Demat account is simple and requires basic documentation such as an Aadhaar Card and PAN Card.
- A Demat account is essential for trading and provides a hassle-free platform for managing investments.
- Identifying growth stocks requires knowledge and skill in analysing market trends and identifying companies with the potential for significant growth.
Conclusion
A growth stock presents a high potential for long term gains in the share market. Therefore, initiating an investment in the stock market can yield returns over an extended period. When investing in growth stocks, prioritising research and factual analysis is crucial. Defensive stocks, conversely, typically belong to companies offering essential products and services like food, healthcare, and utilities. Such firms experience relatively stable demand regardless of economic conditions, rendering their stocks less susceptible to market fluctuations.