Rationale behind Growth Stocks
Growth stocks work on the principle of return optimization. Though markets play a big role and these stocks are not immune to market volatility, yet the purpose is to increase the wealth. These stocks grow at a faster rate. The companies that come under growth stocks are the ones that are either in starting mode or have plans to rapidly expand in coming years.
No stock is risk free and that applies to growth stocks as well. These stocks are from companies that are generally new in the markets and therefore the potential and ability to improve is unknown. Investing in blue chip companies or that are under NIFTY or Sensex basket is safe. However, new chances with growth stocks are attached with risks. If the capacities to rise are unknown, so are the returns. Investing in such stocks brings with it heavy rewards if the idea is successful.
Price swings in growth stocks are often higher than price swings in value companies with large capitalization. The cartel of market cap is lower in these stocks and they can sometimes turn offensive against you on high volatile days. Therefore, it is always necessary that the investment should be made after thorough research and checking the potential. Bogus companies with fraudulent activities should be scanned and avoided. Don't invest in a share looking at others, you should believe in the idea of the particular business and you should be confident on the business prospective. If you are clear on these two counts, go ahead and invest.
Financial Risk Capacities:
Financial risk forbearance differs from person to person. High financial risk tolerant persons can seek chances in growth stocks. Those who can handle volatile situations can also have these stocks as a part of their portfolio. In technical terms, these are high beta stocks that tend to move very quickly, but the timing needs to be considered. Investor makes early money on his portfolio if his investment timing is correct. Therefore, entry should be restricted if the stocks have run up already.
About the Author:
Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent over 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at firstname.lastname@example.org