Every company goes through start up, high growth and mature phase. Companies create the highest wealth for shareholders during the growth phase as it scale up from small to large size.
Usually small to mid-size companies feature in growth stocks. Growth comes either from new product or new geography. A good growth stock has sales as well as profit growth higher than average company in the market. Best growth stocks are often found in a sector that is still under-penetrated.
However, it is important to understand that Growth stocks are risky too. Growth stocks are always very popular and can be priced very high and may lose money rapidly if growth slows down. Average growth stock may lose 30-50% in the interim before it recovers back if growth recovers.
Growth stocks must be complemented with Value Stocks portfolio to reduce variability in returns. At times, there can be higher overlap between Growth and Momentum Stocks.
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