Understand the Risks, Rewards, of Growth Stocks
Last year, I began a series on the three broad categories of stocks. Our focus shifted following the Equifax data breach, and now it is time to pick up the previous thread.
As a reminder, the three types of stock are
For a refresher on value stocks, I invite you to revisit the column.
While value stocks are designed to give investors income via periodic dividends, growth stocks are about the worth of the stock itself. Investopedia describes growth stocks as usually smaller and younger companies that put much of their profits back into themselves to promote expansion.
Amazon is an excellent example of a growth stock. I doubt that few, if any, of the original investors in a book distribution company could have envisioned what the brand represents today. And that success story also illustrates the risks. Amazon just as easily could have been a flash in the pan, or at the very least, too much risk for too little reward. Two examples of the latter in 2017, according to InvestorPlace, were Snapchat and Blue Apron.
Investopedia is quick to point out that the “smaller/younger” description isn’t universal for growth stocks. “Some growth companies are simply very well-run entities with good business models that have capitalized on the demand for their products.” Think Starbucks.
Investors in growth stocks often are seeking diversity in their portfolio by taking on a slightly riskier investment that has the potential to yield a higher reward when it comes time to sell those shares.
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