Are You Ready for the Risks of Owning a Growth Stock?

Written by: MoneyPrime Staff

When it comes to investing, there are a lot of choices out there.  Of course the first step is to figure out your risk tolerance.  For those who willing to assume the greater risk of owning individual stocks, they often identify themselves as either growth investors or value investors.

Growth stocks focus on just that: growth.  While the goal of all stocks is to increase in value, the growth stocks are ones that are already poised to take off in price.  The growth investor is seeking these stocks that have above average growth, and hoping to capitalize on those returns.  Normally a growth stock is already performing well, and is expected to continue its upward trend.  Since these stocks often have rapidly increasing share prices, the companies that issue them have a small or non-existent dividend because they see greater returns by reinvesting their earnings back into the company.  Growth stocks are those issued by companies that are new and exciting.  They often go from relatively unknown, to amazingly popular in a short period of time.  Think about Google (GOOG) and Apple (AAPL), these stocks were virtually unheard of 10 years ago and now they are some of the hottest ones on the market.

The primary reason anyone would invest in a growth stock is the potential earnings will continue to grow.  The stock has proven itself, the company is exploding with growth, and those who want in can jump in and catch the rise in price.  Investing in growth stocks is buying high, selling higher.  The potential for earnings is huge, and the returns can follow but there is the risk that the growth doesn’t come as expected or never comes at all.

But it is not always so pleasant to be a growth investor.  The returns come quickly and so do the losses.  In fact the losses are usually quicker.  The stock is already expensive, and if the investor gets in too close to the top, they may not get out in time before the stock crashes to a sustainable level.  All stocks have a comfort zone.  Too high and they will sink back down, too low and they will expand rapidly.  The trick to investing in growth is to know when the upswings will occur, but more importantly, when to get out to avoid losses.

So who should invest in growth stocks?  They sound like a good deal, but they sound risky.  In fact, that is exactly what they are.  They are a highly volatile, high risk investment.  Those who score high on their risk tolerance questionnaire may be able to sleep soundly with growth stocks in their portfolio.  Those who like the thrill of investing and the possibility of loss love the excitement growth stocks bring.  But for many people, losing money is just not comfortable.  These people may be better served by investing in value stocks.


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