Earning High Return on Equity With Growth Stocks

Investing in the world of the stock market can be a bit confusing. There are so many terms like small cap, growth stock, preferred stock, revenue, profit, loss, ratios, expenses, among many others. All of them created as a special language that can explain the intricacies of the stock market. In this case, let's find out what growth stock is about. It doesn't matter if it is big or small cap growth stock, the important thing is that we understand what does it mean.

What Are Growth Stocks?

Growth stocks, also known as glamour stock, are those kind of shares that are considered interesting for their return on equity (ROE). The ROE is an index used for determining how well did a company invest their earnings for obtaining more earnings. The ROE is obtained by dividing the net income by the stockholder's equity. In order to qualify as a growth stock, the ROE of the company must be 15% or more.

There is one thing that should be considered by every responsible investor. Growth stocks should not be used as part of your cash flow. They are very risky investments that may earn you a lot of money, or loose a lot of money. That's why the dollars that you have set aside for investing in growth stock shouldn't be considered as part of your annual expenses.

What Is The Difference Between Growth And Value Stocks?

The main difference between growth and value stock is that, in the case of the first one, they are shares that have the potential to grow. On the other hand, value stock are shares that are under priced due to a series of factors.

Some characteristics with which a value stock can identified are: the price of the share is the same as the one that appears on the book (or less), the assets are surpass by twice by the liabilities of the company, the price to earning growth ratio is less than one (this is one of the strongest indicators), there is as much equity as debt and, finally, the price per earnings ratio is in the lowest 10% of the rated companies.

Continue to: How To Identify The Best Growth Stock

Bookmark this page Email this to your Friend Add this page to del.icio.us