Advantages and Disadvantages of high growth stocks

Today in the world of inflation people are understanding the importance of investing. But still when people think of investing they are confused with many questions like where to invest. Even when it comes to investing in the stock market there are different types of investing. In that we will study a type which is growth investing and also advantages and disadvantages of high growth stocks.

Table of Contents :

• Growth Stocks
• Advantages of growth stocks
  • (i). Potential for high returns
  • (ii). Good for long-term investors
  • (iii). Capital appreciation
  • (iv). Diversification
  • (v). Innovation
• Disadvantages of growth stocks
  • (i). Volatility
  • (ii). High Valuations
  • (iii). Rely on Future Growth
  • (iv). Lower Dividends
  • (v). Risks
• Conclusion

Growth Stocks :

Growth stocks are stocks of companies that are expected to grow faster than the average rate of growth of the overall market. These are the stocks which have higher growth potential. Whenever a boom in the market comes then these stocks have the ability to lead that and grow at a faster pace than other stocks.

Growth stocks have the big market to prove themselves and due to that they make big sales and grow at a higher pace. Growth stocks also have the unique tagline and product, due to which these grow more than the normal market. In most of the cases the small cap companies are considered as high growth stocks. Now we will study advantages and disadvantages of growth stocks.

Advantages of growth stocks :

Here are some advantages of investing in growth stocks:

1. Potential for high returns :-

Growth stocks are typically companies that are expected to grow rapidly, so if they deliver on that growth, they can potentially provide investors with high returns. The market which these companies usually target is very big. And when they start capturing that market their sales boost rapidly and with that company’s growth boost.

In most of the cases the growth stocks are small cap companies. As we all know a small cap company has a large audience to capture because the audience they have reached is very low and the big market is still remaining. So, when the company goes behind that big crowd they grow with high pace and give high returns to its investors.

2. Good for long-term investors :-

Growth stocks are well-suited for long-term investors who are willing to hold on to their investments for several years. This is because the growth potential of the company may take some time to materialize. Growth stocks sometimes take more than usual time to grow because some companies may not be able to understand the target audience due to lack of data.

But when the small companies understand the target audience and also the way they have to perform their operations then they can boost up their sales with those analysis. So, if a long term investor invests in these companies then he/she can take benefit of that growth in the long term. But short term investors may not be able to get that.

3. Capital appreciation :-

Growth stocks tend to appreciate in value more rapidly than other stocks because investors are willing to pay a premium for the potential future growth of the company. As we have discussed above, the growth stocks have the ability to provide high returns in the long term. So, with that it is obvious that investors will get good capital appreciation by investing in growth stocks.

4. Diversification :-

Diversification is a very important concept for an investor. Every investor tries to make a diversify portfolio to distribute the risk and make the investments less risky. So, looking at that investing in growth stocks can help diversify a portfolio, reducing the overall risk of the portfolio.

Growth stocks can be related to any industry and sometimes to the new one. Also most of the time the growth stock has something unique which is not available in any other company of that sector. So, with that uniqueness we are able to get invested in more sectors and industries which makes our portfolio very diversified. So, this is also the benefit of investing in growth stocks.

5. Innovation :-

Innovation is the biggest advantage of growth stocks. Growth stocks are often companies that are at the forefront of innovation and technological advancement, making them exciting investments that can benefit from new trends and technologies. This leads us to invest in innovative stocks which can turn into multibagger in future.

However, it is important to note that investing in growth stocks also carries some risks, including higher volatility and the potential for the company to not live up to its growth expectations. As with any investment, investors should carefully consider their risk tolerance and investment goals before investing in growth stocks.

Disadvantages of growth stocks :

While growth stocks can offer the potential for high returns, there are also several disadvantages to consider:

1. Volatility :-

As we already know that usually growth stocks are small caps. Small cap stocks have more volatility than large stocks due to their volume size and price also. And this is the reason that growth stocks are often more volatile than other types of stocks, meaning their price can fluctuate rapidly and unpredictably in response to market conditions or news.

This is one of the disadvantages of growth stock. And before we invest in growth stocks we should keep in mind and should try to invest in less volatile stocks and also invest in high liquidity stocks.

2. High Valuations :-

Growth stocks are often priced at a premium compared to other stocks, as investors are willing to pay a higher price for the potential future growth of the company. This can make it difficult to find value in the stock and increase the risk of a sharp decline in the price if growth expectations are not met.

Growth stocks perform huge once they start rally. Sometimes we will see once the stock has become overbought and overvalues but still it will continue to perform. This big rally makes that stock overvalued which means that if fall starts then it can also be big. This is the big disadvantage of growth stocks.

3. Rely on Future Growth :-

Growth stocks have one nature that grows on the basis for future potential. Investors invest only on the basis of the growth they are expecting in the future. So, growth stocks rely heavily on the company’s ability to deliver on its growth expectations, which may not always be possible. If the company fails to meet growth expectations, the stock price may decline significantly.

4. Lower Dividends :-

Companies that are focused on growth may reinvest their profits back into the business, rather than paying out dividends to shareholders. This means that growth stocks may provide lower or no dividends, which can be a disadvantage for investors who rely on regular income from their investments. And we all know that receiving dividend has its own pros and cons.

5. Risks :-

Growth stocks are considered as highly risky stocks. The reason for that is very simple that first of all they are mostly small caps. And we all know very well that small cap stocks have more risk than the stable stocks. Secondly due to the mean reversion concept the fall always comes bigger in the stocks which grow faster.

So, if we talk about investing in high growth stocks then with a sharp boom sometimes we can get a sharp fall. If someone loses patience in that then it can lead to a big loss to the investors. So, risk should be kept in mind.

Conclusion :

As we have understood the advantages and disadvantages of investing in growth stocks now it becomes easy for us to know the reason to invest in high growth stocks. Investors should carefully consider these advantages and disadvantages before investing in growth stocks, and ensure that they have a well-diversified portfolio that is aligned with their investment goals and risk tolerance.

If you consider yourself as an aggressive investor and you can really stay invested in these stocks for the long term then you can invest in them. But low risk investors and aged persons should avoid high risk investment. If you are a trader then you can definitely trade in these but always pick the stocks which have high liquidity and good market size.

These are the advantages and disadvantages of investing in the growth stocks that we know. But take investment decisions with complete analysis and your conviction.

Thank You

Happy Investing