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Growth traders and investors are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth), which should propel their stock price higher in the future.
You'll often find smaller-cap stocks in this category because these are typically newer companies that are in the early part of their growth cycle. But you'll also find mid-caps and large-caps in the category as well.
Growth stocks can carry a higher degree of volatility. But they are also known for producing spectacular returns.
Value investors and traders favor good stocks at great prices. This does not mean they have to be cheap in price however.
The key is the belief that they are undervalued. That they are, for some reason, trading under what their true value or potential really is. And the value investor hopes to get in before the market 'discovers' this and moves higher.
A value investor will typically have a longer time horizon of 6-12 months or more. Value stocks are also typically associated with being less volatile.
Momentum traders and investors look to take advantage of upward trends or downward trends in a stock's price or earnings.
We've all heard the old adage, "the trend is your friend." And who doesn't like riding a trend? Momentum traders believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. In fact, studies have shown that stocks making new highs have a tendency of making even higher highs.
Momentum stocks, like growth stocks, can also carry a higher degree of volatility. Although the momentum trader expects the gains made because of this, to make it all worthwhile.
Income investors are generally looking for companies with stable earnings growth that pay a solid dividend.
Oftentimes, these companies are more mature, larger-cap companies that no longer have the kinds of spectacular growth rates like some of the younger or smaller companies, or like they themselves had when they were younger and earlier in their growth cycle. Many of these companies are generating huge amounts of cash, but because of their size, may not have the growth opportunities they once had.
Income investing is typically considered to be a more conservative style of trade, if done right. And the income investor will typically look to hold onto his or her stocks for a longer period of time.
One of the keys to successful trading is to get into stocks that are in alignment with who you are as a trader. Gladly most people fit into one of the four main investing styles: Growth, Value, Momentum and Income. This page is dedicated to the growth style. Watch the short video below and read education material underneath to learn the habits of successfully trading with growth stocks.
Big Growth For Big Returns
Growth traders are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth), which should propel their stock price higher in the future.
"Growth traders are primarily focused on stocks with aggressive earnings growth or sales growth, which should lead to higher stock prices."
You'll often find smaller-cap stocks in this category because these are typically newer companies that are in the early part of their growth cycle. But you'll also find plenty of mid-caps and large-caps too.
By concentrating on Zacks Rank #1 and #2 stocks, growth investors can easily screen for companies exhibiting these stellar growth rates with a likelihood of it continuing.
The best part of the Zacks Rank is its ability to alert investors, at the earliest stages, that a company's prospects are looking very bright. And getting in early on an emerging growth story generally leads to strong investment returns.
Caution
Many growth investors, however, make the mistake of looking for stocks with the highest growth rates possible. Unfortunately, many such companies underperform in spite of their outsized growth rates.
How can this be? Often it's because those sky-high levels of growth are unsustainable. And the stocks are priced for perfection.
For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward revision to 5 cents, that's a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.
If you've ever wondered how a stock with a triple digit growth rate could possibly go down? That's how.
Finding Growth Stocks the Right Way
The Zacks Rank, which keys in on earnings estimates revisions, rather than growth rates in absolute terms, guards against that to find the stocks with the best growth prospects that are continuing on the upswing.
The Growth Score further evaluates companies based on their corporate financial statements, which includes the Income Statement, Statement of Cash Flows, and the Balance Sheet, amongst others. Those with a Growth Score of A or B are deemed the strongest and are expected to yield the highest return over the next 1-3 months for investors.
Take note that the Zacks Rank and the Zacks Style Scores, also work together to notify investors at the first sign of weakness (Zacks Rank of #4 or #5, and a Score of D or F), providing the opportunity to lock-in profits and avoid unnecessary losses.
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"Your portfolio is hands down better than any other I have tried."
- Christopher M. of York, ME