How To Buy Growth Stocks UK
As an investor, your primary goal is to put your money into assets that can get you the most returns. One way to do this is to find established companies with a long-standing reputation that pays out regular dividends - which is often considered a safer way of investing.
On the other hand, if you are willing to take on a bit more risk - then you might want to look into growth stocks. After all, these are companies that are expected to outgrow their peers and have the potential to help you attain more attractive returns.
In this How to Buy UK Growth Stocks Guide, we will give you an overview of this particular equity-type and walk you through the steps of investing in such companies via a regulated broker.
How to Buy UK Growth Stocks in Five Steps
Step 1: Find an FCA-regulated broker that can give you access to growth stocks.
Step 2: Create an investment account.
Step 3: Deposit money into your investment account.
Step 4: Find the growth stock you want to invest in by using the search box.
Step 5: Complete your growth stock purchase by entering the amount you wish to invest into the company.
When completing the above process - you will be able to buy growth stocks on a 0% commission basis and without paying any stamp duty tax.
Although these five steps offer you a quick glimpse, there is quite a lot that you need to know about growth stocks before you can start making informed investment decisions.
Let us start with the basics of what growth stocks are.
What Are Growth Stocks UK?
Growth stocks are companies that are expected to perform at an above-average rate when compared to the wider market. Typically, these often have a competitive advantage that justifies their potential upside.
For instance, Amazon is still considered one of the most popular growth stocks among investors - even decades after its IPO in 1997. Back then, you could have purchased five shares of this company with a decent sum of $100.
At that time, the online commercial market was still new and rapidly evolving. Amazon has taken advantage of this, and for many investors, this stock presented them with an original, interesting opportunity.
In 2021, at the time of writing, the price of a single share of Amazon is valued at $3,494. As you can see, the company has had tremendous growth in over two decades and is still expected to continue in this upward trajectory.
In essence, a growth stock can be any company that has the capability to expand further in the future. It could be introducing a new product, tapping into an untried market, or even offering an above-average service that sets them apart. Tesla, Netflix, and Apple are all part of this category.
However, it is crucial to note that growth stocks do not always mean new companies or ones that are making a substantial profit. Instead, investors are attracted to these firms due to the potential high cash flow, which can increase the overall value of their investment.
Put otherwise, when you invest in growth stocks, you do so because you believe that the company will perform exponentially well in the future. This will, in turn, allow you to make attractive profits.
How to Identify Growth Stocks in the UK
When thinking of how to buy growth stocks UK, you will first need to be able to identify these hidden gems in the market. As it goes, there is no single formula that you can use to spot such potential investment opportunities.
However, over the years, investors have managed to trace a few characteristics that are widely common to most growth stock companies. Let us explain what these indicators are.
High P/E Ratio and Earnings-Per-Share
Two of the most notable attributes of growth stocks are their high P/E ratio and earnings-per-share (EPS). In a basic sense, this indicates that the profits of the business are increasing at a faster rate than the market average.
Taking Amazon as our example again, the EPS of this company for the 12 months ending June 30, 2021, was $57.43, which is a 120.8% increase year-over-year. It is very rare even for stable and established firms on the FTSE 100 to match this level of growth.
Alongside high EPS, growth stocks are also inclined to come with an above-average price-to-earnings (P/E) ratio. This measures the value of a company in relation to its EPS.
A high P/E ratio often indicates more expensive growth. This makes sense as these companies are promising to outperform the market.
For instance, Netflix has a P/E ratio of 57.57 in 2021. In comparison, the P/E ratio of the FTSE 100 average stands at 13.66. The higher value of these stocks is often derived from the expectations surrounding the company to deliver considerable growth in the future.
If you consider the high P/E ratios of growth stocks, you will also find that these tend to be overvalued. In other words, the price of these company shares are usually deduced with the assumption that they are yet to attain their full potential when it comes to profits.
This is because a majority of growth stocks typically reinvest their earnings into product research and expansion. For instance, Netflix had borrowed over $16 billion over the last decade to develop more content. This is owing to the fact that the streaming giant did not make enough money to meet the costs involved with payroll and keep up its production.
However, as of January 2021, Netflix reported that it would no longer need to borrow money to cover day-to-day costs and pay back the existing loans. This has come as good news to all those investors that had remained committed to this growth stock over the course of ten years.
However, it is impossible to ignore the volatility commonly associated with growth stocks. That being said, such vulnerable finances could also be pointing to the fact that the company is evolving.
To continue from the previous section - since growth stocks do not always make profits, it only makes sense that you cannot expect these companies to pay out dividends.
Another reason for this is that emerging businesses might also be reinvesting their earnings into other areas. For instance, in spite of high profits, Amazon is yet to pay a single dividend to its shareholders.
Instead, the company has reinvested its profits to other side ventures, expanding to renewable energy, streaming services, artificial intelligence, and other markets.
However, if these companies are to continue their upward stride, they could emerge to become dividend-paying stocks in the future.
As we discussed earlier, one of the first signs to look for in a growth stock is its competitive edge. For instance, the company might be offering a unique product or a patented technology that can give a significant boost to the value of its shares.
This might be in the form of a new idea that has not yet taken over the market - such as the cases of social media giant Facebook or streaming service Netflix. Growth stocks might also differentiate themselves by being able to deliver low-cost products compared to the rest of the market.
This could be because they are able to source low-cost raw materials or have come up with efficient methods for production and distribution. For instance, Ikea introduced a new business model with ready-to-assemble furniture that set it apart from its competitors.
In addition, better service quality or customer-friendly warranty terms can also give a company a competitive edge, thus making it a growth stock in the eyes of investors.
A Growth Market
If all the above factors have to succeed, the stock in question needs to be in a market that is in growth mode. If the particular industry is already saturated and has no room for advancement, then it cannot be a good fit for this category.
For instance, in the current landscape, a new PC hardware manufacturer might not make it to a growth stocks list, but a mobile vendor would. In addition, your chosen companies should also have high market capitalization and have the right elements to sustain this advantage.
As you can see, growth stocks can come in all shapes and sizes. These companies can mostly be found among the latest ventures across the world. That said, even if a business has an original vision and an innovative model, there is no guarantee that its share price can reach new heights.
Check Out: 10 Tech Companies To Invest In
AIM Growth Stocks
Growth stocks can be found in all international markets. And today, with online brokerage sites, you will be able to gain exposure to companies based in any country.
However, if you want to tap into domestic opportunities, then you will want to note that most of the growth stocks in the UK are listed on the Alternative Investment Market (AIM).
For those unaware, AIM is the submarket of the LSE, designed to help smaller companies gain access to public capital. This, of course, fits the definition of growth stocks which are emerging businesses.
In other words, if you are considering how to buy growth stocks UK, it would be best to look into companies listed on the AIM. However, while doing so, you should bear in mind that not every new business will have the same level of potential or chances of succeeding.
Some firms, even with all the right characteristics, might enjoy a brief period of success in the market, only to see their share value depreciate after a while.
All that being said, there is a simple strategy that you can adopt - by investing in not one but many different growth stocks that demonstrate potential. You can do this by choosing to put your money into an ETF instead - which can give you exposure to shares in a group of equities.
Some of the most popular and high-performing ETFs in this category include the Vanguard Growth ETF (VUG), iShares Russell 1000, and Invesco QQQ Trust. This way, you can track a broader range of growth stocks, limiting your risk while giving you the opportunity to make significant gains through diversification.
Why Should You Buy Growth Stock UK?
As we have already established, growth stocks can be a great way for you to generate high returns on your investment. However, the key is to understand whether these are a good fit for you, given your circumstances.
Typically, growth companies use their earnings, profits, and resources to further expand their services - adding more to their value and generating more revenue in the long run.
They also tend to do better when there is a bull market for stocks in general. However, on the flip side, if the economic health is following a downward trend, growth companies might also take a hard hit.
All these factors aside, there is no guarantee that a growth stock will keep up with the expectations of investors. This is why you will want to do adequate research and assess the market before making an investment.
Ultimately, when it comes to choosing an asset for your financial portfolio, your time horizon and risk appetite are the main factors to be considered. Growth investing can be a powerful tool if you are willing to commit to the asset for the long-term, ready to ride over the market volatility.
Difference Between Value Shares and Growth Stocks
While we are focusing on growth investments in this article, it is important to emphasize how things differ from value stocks. In fact, it is not uncommon for beginners to confuse these two investment products.
One stark distinction of a value stock is that it is often 'undervalued' in relation to its intrinsic worth. This gives you an opportunity to acquire the shares of a company at a low price - so that you can make profits when they get back their perceived value.
This low share price is usually short-lived due to an underperforming quarter or negative news surrounding the firm. Moreover, value stocks also tend to be stable and established companies - meaning, you can also expect them to pay dividends.
All these factors enable you to make better returns on value stocks, and notably, in short to medium terms.
On the contrary, growth stocks are viewed to be overpriced due to their high P/E ratio. Even though they can be potentially lucrative, it can take you a long time to make profits.
There is also a high-risk rate associated with such companies, which is not often the case with value stocks.
Read More: Understanding the Market Value of a Company
What Are The Risks Of Growth Stocks?
When thinking of how to buy growth stocks UK, there are a few risk factors that you need to be aware of - such as:
Unproven Business Models
No matter how you look at it, investments are always based on speculation. However, there are ways for you to analyze your choices, such as by looking at the performance history of an asset.
That is not the case with growth stocks. This is because when you are putting your money behind a new idea or an innovative business, you are taking a higher risk. There is no way to find out how the firm will perform in the future, primarily because nobody else has attempted this before.
Even if the company has the right business model, the market could go against the growth stock in question.
As our guide has already pointed out, it is common for growth stocks to be overvalued - even if they do not generate much in profits. In fact, some of these companies might be running at a loss.
While investors might overlook inflated prices in the beginning, if future earnings reports continue to be disappointing, it is likely that shareholders will lose their interest.
This could lead to investors selling off their shares and resulting in the value of the growth stock plunging. Needless to say, this could mean that you end up cashing out your investment at a loss - that is, if you decide to sell at all.
Since most growth stocks belong to emerging industries, there is always the chance of new competitors coming up. If there are several companies active in the same space, this can lead to fierce competition.
As such, this can put a new venture at risk - especially if a competitor has access to more resources and funding.
For example, although Vimeo had a good start in the market and continues to offer better features to users, it still cannot get anywhere close to YouTube. Needless to say, this is primarily because it is not easy to compete with the platform’s parent company - Google.
Overall, growth stocks are quick to react to market swings, and as such, the overall risk linked to this category is on the high end. If you are seriously considering investing in such companies, make sure you have a strategy that fits with your goals and immediate cash needs.
How to Buy Growth Stocks UK - Step-by-Step Instructions
If you have managed to stick with us until now, you would have already gained a fair idea about what growth stocks are and how to identify them. Once you have done your research and found your opportunities, it is time for you to take the next step in your investment journey.
The process of purchasing shares of companies has become easier than ever. In this section of our How to Buy Growth Stocks UK Guide, we will walk you through the different steps involved in making an investment.
Step 1: Choose a Regulated Broker
Contrary to the common misconception, investing in growth stocks need not be a complicated process. In fact, with the right broker, you can complete the end-to-end process within a matter of minutes.
However, choosing the right investing platform can be a time-consuming task, especially for the beginners among you.
As this is a decision you don't want to get wrong, we have created a list of factors you can consider.
- License and Reputation - There is no question that you want your broker to be transparent and trustworthy. After all, you are entrusting your money with the site in question. And as such, you need to make sure that your chosen platform is regulated by at least one respectable financial authority - such as the FCA, SEC, CySEC, ASIC, or FSA.
- Payment Method - Find out how you can make deposits and withdrawals on the platform, and what kind of payment methods are supported by the broker.
- Minimum Investment - Many brokers won't allow you to start investing in growth stocks unless you meet their minimum investment requirement. You want this amount to be on the lower side, so you can buy these assets without having to risk large sums.
- Fractional Shares - As we discussed, growth stocks often tend to be overpriced. This is why you might want to consider brokers that offer fractional investments so that you can buy partial shares in a company that fits your budget.
- Fees and Commissions - There are a variety of charges associated with buying growth stocks via a broker. Make sure that you understand how much you are paying in commission, and any other fees linked to deposits and withdrawals.
- Trading Interface - If you are a beginner, it is crucial that you choose a brokerage platform that is beginner-friendly and easy to navigate.
- Stock Markets - If you want to buy growth stocks not only in the UK, but also in the international markets, make sure that your chosen broker offers access to both domestic and foreign exchanges.
As you can see - it wouldn't hurt you to shop around and check out a few brokers before deciding on where you want to open your investment account.
With that said, if you’re strapped for time, it might be a good idea to check out the FCA-regulated broker eToro. This platform can give you access to both domestic and international growth stock markets - such as the LSE, NYSE, NASDAQ, MTA, and more.
In addition, you will also be able to buy growth stocks via fractional shares ($50 minimum), and at a 0% commission rate. Moreover, eToro has been designed with beginners in mind, so you will be able to make investments with utmost ease.
Step 2: Open Your Investment Account
Once you have arrived at a decision regarding your stock broker, you can choose to open an account with the platform.
On eToro, this can be done by signing up as a user, providing your email address, and assigning a password for your account. This process remains more or less the same across all brokerage platforms.
You will be asked to provide your full name, home address, date of birth, national insurance number, and contact details.
If you have chosen a regulated platform like eToro, you will also be required to upload some ID - such as your passport or driver's license, and a utility bill that can verify your address.
Step 3: Add Funds
Once your ID has been verified, you can deposit funds into your account. Depending on your chosen broker, you might be required to transfer a minimum amount in order to start buying growth stocks.
Most brokers like eToro accept a variety of payment methods, including bank transfer, debit/credit card, and e-wallets such as PayPal.
Step 4: Buy Growth Stocks UK
When you have funds in your account, you can now start with your investment. If you know which company's shares you wish to buy, you can search for the growth stock on the brokerage platform.
When you have located the stock, you can enter the amount of money you wish to invest in the company. Then, confirm the order to complete the investment.
And that’s it - you have just learned how to buy growth stocks in the UK with eToro at 0% commission!
How to Buy Growth Stocks UK - Conclusion
As we have discussed, there are several factors that can result in an innovative company coming forth as a growth stock. If these different attributes come together with a favourable market, businesses with a competitive edge will often see their prices going up at a much faster rate.
However, not every company is the same. Although growth investments have the potential to reap great rewards, there is also a higher risk associated with this type of asset. As such, you will need to be cautious when picking the best opportunities.
Alternatively, as our How to Buy Growth Stocks UK Guide pointed out - you can also consider investing in an ETF that represents the wider markets with the potential of high returns.
Regulated broker eToro can give you access to several ETFs that focus on growth investments, all on a commission-free basis. Plus, if your chosen growth stock is listed in the UK - you won’t pay any stamp duty!
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What are growth stocks?
Growth stocks are shares of companies that are expected to outpace the rest of the market and generate more revenue in the future.
How to buy growth stocks UK?
You can buy growth stocks in the UK by creating an account on a regulated broker and verifying your ID on the platform.
What is the best strategy to invest in growth stocks UK?
There is no single strategy that fits every investor. However, it might be a good idea if you diversify by investing in a growth stocks ETF, which will reduce your risks. This is because your chosen ETF will contain dozens of different growth stocks.
How to identify growth stocks?
Growth stocks are generally overvalued with a high P/E ratio. They also tend to have some kind of competitive advantage in the market, such as an innovative business model.
When to sell my growth stocks?
If a particular stock has stopped growing for a prolonged duration or has begun to slow, it might be time to consider selling.