How do I Invest in a Growth Stock?

Anticipating stock growth is like a parent excitedly waiting for a child to grow taller.

Anticipating stock growth is like a parent excitedly waiting for a child to grow taller.

Like a parent waiting for a child to have a growth spurt and anxiously anticipating the chance to make a new pencil mark on the measuring chart, investors in growth stocks look forward to the day that the companies will grow their share prices. You can become a growth stock investor once you understand how to invest in them.

Understand the Basics of Growth Stock

Step 1

Learn the definition of growth stocks. They are shares in companies that are poised to grow fast, taking their share prices with them. Their prices are expected to rise and outperform the broad market.

Step 2

Prepare your stomach for a bumpy ride. Many growth stocks are in smaller companies that haven’t fully matured, and there might be growing pains along the way.

Step 3

Once you understand the underlying risks, you may be ready to invest.

Find Growth Stocks

Step 1

One simple way to find growth stocks is to read the prospectus of a mutual fund or exchange-traded fund (ETF) that invests in them. These funds often have the name growth in their names. A fund’s prospectus details which stocks it owns. You can read why a fund manager has chosen certain stocks, and then you can decide if you want to make them a part of your portfolio.

Step 2

Many financial advisers recommend that you buy what you know. If you’re familiar with a company and its products, you may have a better chance of realizing whether it has growth potential.

Step 3

Research a company before you buy its stock. Look for information in newspapers and news magazines. Check if it has filed financial reports with the Securities and Exchange Commission (SEC), and read its filings. The websites for the stock exchanges, like NASDAQ, have reliable online stock research tools.

Open a Brokerage Account

Step 1

Before you buy any type of stock you first need to have a brokerage account. You can open an account with a traditional, full service brokerage firm or with a discount brokerage.

Step 2

If you already have an employer-sponsored retirement plan, like a 401(k), you might want to make growth stocks a part of your retirement portfolio. You may additionally be able to establish an additional taxable account with the same financial services company. Otherwise ask savvy friends to recommend a brokerage or search for one online.

Step 3

Call customer service, visit a local investment center or access the brokerage firm’s website to set up the paperwork to open a new account.

Making a Trade

Step 1

Determine how much money you want to invest and which growth company’s shares you want to buy.

Step 2

Call your broker or go to your brokerage account online and put in an order.

Step 3

Pay for your purchase with an electronic funds transfer direct out of your checking or savings account.

Invest through Mutual Funds

Step 1

Instead of buying individual stocks, you can purchase mutual funds.

Step 2

In addition to funds with growth in their titles, you can look at funds in sectors that are likely to experience growth, like technology or natural resources.

Step 3

You can set up regular, monthly investments or make periodic purchases.

Tips

  • 1. Observe the marketplace around you. If you notice all the neighborhood teens wearing a particular clothing brand, take it as a sign that the retailer’s stock may be on the rise. When you read that a car manufacturer is expanding to overseas markets, that might mean its price is about to expand, too.
  • 2. If you don't want to spend a lot of time on corporate research, buying a growth mutual fund might be a better investment than individual stocks.
  • 3. Be patient. A stock won't always take off the day after you buy into it.

Warnings

  • 1. Some growth stocks may end up just being runts who never become fully grown. You could even lose a lot of your initial investment. Invest cautiously.
  • 2. A company that has already been growing rapidly may be running out of steam and might not have much room left for further growth.
  • 3. Don't avoid companies that have been around a long time. They may have a new product ready to launch or might be penetrating a new market, so established companies can also be growth stocks.

About the Author

Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.

Photo Credits

  • Ryan McVay/Photodisc/Getty Images