Growth Stocks

Stock markets offer different types of stocks from which the investor may select based on personal needs. There are stocks that pay more dividends, and are suitable for people who are in retirement. Those who are employed, and can forego the dividend for future gains would prefer to invest in growth stocks. Fundamentally, growth stocks are the stocks of those companies that have high return on equity, and need to retain the profits instead of distributing them, for their future plans such as expansion, renovation, acquisition, etc. Such ploughing back of the profits results in further increase of return on equity.

Growth stocks show a strong track record of growth in the past, and historically, their return on equity is also higher. Growth means the size of operations. Return on equity can be understood like this. Suppose a company has stock of $1 and the profit earned during the year on this is $0.20. Then the return on equity will be 20 percent. Note this is different from dividend. The business may pay only 50 percent of this 20 percent as dividend, so the two are not same. Growth stocks also have history of higher earnings per share. Earnings per share and return on equity are similar concepts.

Whereas return on equity is expressed in percentage, EPS is expressed in currency. EPS is, as the name implies, net earnings divided by the total number of shares on the day. The two may seem absolutely alike when they are considered on a unit share of unit value. However, they start varying when the profits are ploughed back. The investment increases and therefore denominator for calculating return on investment also increases. Unlike this, the total number of shares forming the denominator in calculation of EPS does not vary. Because of this, the answers for the two would be different.

How does one easily identify growth stocks In these days of disclosures, business enterprises are expected by stock exchanges to disclose their plans of expansion, acquisition, etc., as stipulated under the listing agreement between the company and the stock exchange. So knowing the plans of the company has become fairly easy. Listed companies are also required to disclose all material contracts so that investors can make informed decisions.

Investment advisors are divided on whether growth stock yield higher profits on stock markets, or the value stocks fare better. Value stocks are classified based on price of the stock on stock exchange in relation to the actual book value or price of the stock in relation to earnings. The closer the value is to book value, (i.e., value genuinely existing as per the books of account), greater are the chances that it will fetch some returns on bourses. This, however, is not always true.

In 2008, stocks like MacDonald, and GE, apart from Baker Hughes, Ormat Technologies, and Imperial oil were considered to have high growth potential. In 2009, financial companies such as Bank of America, and Prudential are leading the growth pack. They are accompanied by likes of CIGNA Corp., and Agilent Technologies. Massey Energy, Intuitive Surgical, and CB Richard Ellis Group are some of the companies that have been on top this year.