Growth Stock
A Growth stock, are stocks of companies whose sales and earnings have grown faster than the normal, and are expected to do so in the future. Some of these growth companies may pay dividends, however younger growth companies typically put all their profits back into their business to grow it more. The performance of these stocks depend less on the economic forces that buffet the cyclical stocks than on the quality of their products and management. As the name implies, stock growth companies often have room for substantial expansion, which means their stocks have room for an equal measure of price appreciation in the stock market. That means many Small Cap stocks are Growth Stocks by nature. In his book How To Make Money In Stocks: A Winning System In Good Times and Bad, Bill O'Neil outlines his canslim system, using the breakout trading method.
In the beginning phase of a new bull market, high growth stocks are usually the first sector to lead the market, and make new price highs. This is when the growth stock outlook is at its most optimistic. Young growth companies will usually dominate for at least two bull market cycles. Then the emphasis my change for the next cycle to turnaround or Cyclical Stocks...or newly improved sectors of the market, such as Consumer Stocks, Penny Stocks, or Defensive Stocks which sat on the sidelines in the previous cycle. Each soaring new stock market cycle will catapult fresh leadership stocks to the attention of the market. The growth record in itself is only a starting point for growth traders, and should be first of many earnings measurements you should check. The percentage increase in earnings per share is the single most important element in growth companies selection for stock trading. The bigger the percentage increase, the better, as long as you are not mislead by comparing current earnings to nearly non-existent earnings for the year earlier quarter.
It is the unique combination of theses two critical factors that creates a superb stock, one that has great potential for big share price appreciation. When used with the Breakout trading strategy, nice profits can be made for you. And do not buy a stock solely because the P/E ratio looks cheap. There is usually a good reason why it is cheap, and factual analysis of each cycle's winning stocks show that the P/E ratios have very little to do with whether a stock should be bought or not. That is unless you are a Value Investor. Growth Stock investing, can be one of the most profitable trading strategies!
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