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Growth stocks tend to pay low or no dividends and instead reinvest their retained earnings into growing revenue-generating capacity, giving them some sort of competitive edge and building up loyal and expanding consumer bases.
1. High Earnings Growth Rate
The ideal growth stocks boast fair valuations and sustainable earnings and revenue growth over time. Furthermore, they possess a competitive advantage such as niche market position or innovative technologies or strong brand recognition that could serve them well in future investments.
Growth companies typically do not pay out dividends because most of their profits are reinvested back into their businesses to fuel future expansion and create additional profit. Although this provides passive sources of income to investors, growth stocks do present higher price volatility risks for shareholders.
Amazon stands out as an outstanding growth stock due to its commitment to innovation and vast customer base, while tech titan Nvidia has been at the forefront of virtually every popular trend over the past several years with their GPU chips – such as autonomous driving and crypto mining.
2. High Return on Investment
Good growth stocks typically produce substantial capital appreciation over time. This is usually because they offer something unique that appeals to their target consumer base and possess robust revenue growth potential, with proven earnings and sales increases over time.
These stocks may not pay out dividends to investors because the company prefers reinvesting profits back into itself for future growth, making their return on investment dependent upon share price performance and revenue increases.
Apple was able to achieve exponential revenue growth thanks to their devoted and growing consumer base that associated themselves with their brand rather than individual products, providing a competitive advantage and leading to exponential revenue expansion.
3. High Level of Ownership by Top Executives
As growth stocks do not typically provide dividends, investors make their returns through capital gains upon selling their shares – this increases risk because if companies do not meet growth forecasts they could lose out financially.
To identify good growth stocks, seek companies with strong revenue and earnings growth rates as well as large TAMs (total addressable markets) and market shares within their industries.
Keep an eye on the level of ownership held by senior executives. An elevated ownership level ensures that shareholders’ interests align with those of management – giving the business incentive to serve customers well and continue growing. Conversely, low executive ownership could be an indicator that something might be amiss within your organization.
4. High Market Share
As well as revenue growth, good growth stocks also possess a sizeable market share in their industry, giving them the ability to build a loyal consumer base that drives company success.
This results in a competitive edge for their company, which allows it to outgrow competitors more rapidly. This could involve being first to launch a service or having an exclusive selling proposition that differentiates themselves from rival companies.
Growth stocks often pay minimal or no dividends due to their strategy of reinvesting annual profits to improve future earnings potential, thus decreasing short-term profitability but yielding huge capital gains if investors hold them long enough.
5. Strong Competitive Position
The ideal growth stocks possess a strong competitive position that enables them to expand more quickly than their competition and gain market share more rapidly than other businesses in their sector. They also possess exceptional leadership teams with promising future growth potential in their respective industries.
Growth companies typically disburse low or no dividends to shareholders in order to reinvest all profits back into the company to expand further, leading to more frequent and volatile stock price movements on a chart. This often results in stock prices showing higher highs and lower lows than previously observed.
An outstanding example is Amazon, who forgoing profits early on to become one of the leading online retailers with a dedicated customer base. Another stellar example is Apple, who consistently innovate their products to keep customers coming back for more; their unique brand differentiates them from competitors.
