There are many types of shares that you can invest in. While some are strong and stable companies that have a long-standing history of paying dividends, others are referred to as growth stocks.
Put simply, growth stocks are firms that are expected to grow at a faster rate than other stocks in the same sector or industry. In turn, you will likely find that the P/E ratio of the share in question is somewhat expensive.
In this guide, we explain everything there is to know about growth stocks in the UK. Not only does this include a Layman’s overview of how this particular stock type works, but we also discuss some of the best growth stocks to consider in 2020.
- 1 Top 10 Growth Stocks to Buy Now
- 2 Best Growth Stocks in the UK 2020
- 3 What are Growth Stocks?
- 4 Characteristics of Growth Stocks
- 5 AIM Growth Stocks
- 6 Why Invest in Growth Stock?
- 7 Value Shares vs Growth Stocks
- 8 Risks of Growth Stocks
- 9 Where to Buy Growth Stocks
- 10 How to Invest in Growth Stocks
- 11 Step 1: Open an Account and Upload ID
- 12 Step 2: Deposit Funds
- 13 Step 3: Buy Growth Stocks
- 14 Conclusion
- 15 eToro – Buy the Best Growth Stocks with No Commission
- 16 FAQs
Top 10 Growth Stocks to Buy Now
Before we look at 2020’s best growth stocks in more detail, here’s a quick summary of the top growth stocks to invest in right now.
- Beyond Meat
- SolarEdge Technologies
- Trade Desk
Best Growth Stocks in the UK 2020
So that you know the ins and outs of how growth stocks work, we now need to pin-point some possible investment opportunities. While there are many growth stocks to choose from, below we discuss three of the most prominent as of mid-2020.
Roku is a US-based tech firm that allows all consumers to benefit from smart TV services without needing to own a high-end device. Instead, you simply need to purchase the Roku device and connect it to your TV. In doing so, you’ll have access to a plethora of streaming services like Netflix and Amazon Prime.
In terms of its stock market offering, this growth share is listed on the NASDAQ. Roku has enjoyed a fruitful time since it went public in 2017. Back then, you would have paid just $23 per stock. Fast forward to September 2020 and the very same shares will cost you $157.
This represents a 3-year increase of over 580%. We should also note that Roku started the year at $132. This is crucial, as the firm has quite clearly weathered the coronavirus storm. With a market capitalization of just under $20 billion, many would argue that this growth stock has a long way to go. As such, at sub-$160 per share, you stand the chance of buying the stocks at a favourable price.
Your capital is at risk.
2. Beyond Meat
Launched in 2009, Beyond Meat is has taken the food industry by storm in recent years. The firm is renowned for producing top-quality meat-substituted products that are 100% plant-based. This is a sector, in particular, that is experiencing rapid growth with health-conscious consumers that are looking to do their bit for the environment.
This sentiment is evident by the speed in which Beyond Meat has grown. For example, the stock only went public in May 2019, where it was initially priced at $89. Opting for the NASDAQ, Beyond Meat shares then exploded to $234 in a matter of weeks. This resembles a staggering increase of over 250%.
The shares have since cooled off, with a current market price of $143. However, this is still 116% higher than its 2019 IPO. Taking into account just how young this growth stock is, the upside potential on Beyond Meat is huge.
Your capital is at risk.
Zoom is a cloud-based software company that specializes in video conference technology. Although the firm was launched in 2011, it wasn’t until the coronavirus lockdown period that it truly made a name for itself. After all, Zoom was often the bridge between family and friends during a time when travel restrictions were keeping people apart.
It was also the preferred method of communication between workers that were unable to attend their place of employment. In terms of its stocks, Zoom went public in September 2019. Back then, you would have paid in the region of $62 per share. At the time of writing in September 2020, the stocks are worth just over $403.
As such, early backers of the video conference company are now staring at returns of over 550%. Not bad for just over 12 months of trading. With a market capitalization on the tech-hungry NASDAQ of $114 billion, there is plenty of upside in the making for this growth stock.
Your capital is at risk.
Peloton is yet another tech-driven growth stock that is worth keeping an eye on. For those unaware, the company specializes in cutting-edge exercise equipment that allows you to align your workout with the digital age. Each product can be hooked up to a Peloton instructor, which comes jam-packed with classes, routines, strategies, and all-round exercise tips. You can even obtain live one-on-one sessions with a personal trainer.
Even more impressively is the social aspect of the product. This is because you can virtually compete against other users of the equipment with live leaderboards. This looks at everything from speed to the number of calories burned. The firm’s rapid success means that Peloton shares are now valued at $82. This is impressive when you consider that the company only went public in September 2019 at $25 per stock.
As such, the shares have more than tripled in just over 12 months. The Peloton model – which is based on a subscription service, is still relatively unknown in the wider fitness community. With this in mind, the firm has a significant amount of market share to eat away at. On the flip side, with the pandemic resulting in more and more people choosing to work out from home, there is no reason to believe that Peloton shares are likely to slow down any time soon.
Your capital is at risk.
Etsy is an online marketplace for vintage products and handmade craft designs. This includes everything from clothing to jewellery, to furniture and fine art. Although this might sound like a relatively small market, think again – as Etsy is now worth over $13 billion on the NASDAQ.
When the firm first went public in 2015, investor sentiment was relatively weak in the months to follow. This is because the stocks went from an initial price of $27, down to just $8 in 2016. However, the shares began to explode in the wake of the pandemic lockdown, subsequently hitting highs of $135 in August 2020.
This means that in just under five years of trading, Etsy investors are looking at gains over 400%.
Your capital is at risk.
Although Paypal was founded in 1998 – it wasn’t until 2015 that the firm made the decision to go public. Back then, you would have paid $34 per share. It is somewhat unusual to classify a two-decade-old company as a growth stock, but many would argue that Paypal is still in this phase.
After all, the stocks are now worth $186, meaning that they are in the green by 447% in just 5 years of trading. 2020, in particular, has been a good year for the e-wallet provider. Starting the year at $110, this means that Paypal shares are up just under 70% as of September.
Your capital is at risk.
7. SolarEdge Technologies
As the name suggests, SolarEdge Technologies is a new-age tech firm that specializes in solar power optimization. With the world looking to move away from carbon emissions and fossil fuels, SolarEdge Technologies is well positioned to take a lead in the ever-growing green energy space.
The firm is listed on the NASDAQ with a current market capitalization of just under $10 billion. It first went public back in 2005 at a share price of $21. Initially taking a slow and steady approach to growth, SolarEdge Technologies is now worth $196 per share. This translates into a 5-year increase of over 830%.
Your capital is at risk.
8. Trade Desk
Big data is yet another buzz word that you might have come across in recent years. However, it’s a lot more than just a fad, as the big data sector is expected to be worth $230 billion by 2025. In terms of where the Trade Desk fits into this ever-growing market, the firm operates a cloud-based service that sells data to advertisers.
In terms of the financials, the Trade Desk continues to smash through quarterly targets and market expectations. The firm has also experienced rapid growth in the stock market. It first went public in 2016 at a price of $27. At the time of writing, the very same shares are worth $427. This means that in 4 years of trading, the Trade Desk has made over 1,481% for early backers.
Your capital is at risk.
Salesforce is yet another growth stock that is involved in cloud-based software. More specifically, the firm is behind high-grade CRM platforms that bridge the gap between companies and clients. Looking back at its historical performance on the NASDAQ, Salesforce shares were initially priced at just under $4 in 2004.
Fast forward to September 2020 and the very same stocks are priced at $246. However, much of this growth has occurred in 2020 alone. For example, the shares hit lows of $115 in March. However, with a 52-week high of $284 to follow in August, this represents growth of 146% in just 5 months.
We should also note that the firm’s recent earnings report smashed through market expectations. For example, year-on-year revenues jumped by 29% for the quarter, and earnings per share rose to $1.44. Even more impressively, it was recently announced that Salesforce would replace Exxon Mobil as a Dow Jones 30 constituent.
Your capital is at risk.
NVIDIA is a market leader in the GPU arena. The firm provides consumers with a high-end gaming experience through PCs, laptops, and mobile devices. Although NVIDIA was launched way back in 1993, it is still very much a growth stock. In fact, this particular pick is a run-away winner in terms of end-to-end returns for investors.
For example, NVIDIA was priced at just $1.64 per share in 1999. This put the company firmly within the category of a penny share. While the stocks had a somewhat disappointing run in the 2018/19 fiscal year, it’s been up, up, and away ever since.
In fact, a single NVIDIA stock would now cost you $514. As a result, those buying the shares back in 1999 would be looking at gains of over 31,000%. In simple terms, this means that an initial investment of £1,000 would now be worth £310,000. While you might be concerned that you’ve missed the boat with this one – you shouldn’t be.
After all, the stock continues to return huge gains for investors. For example, in the 12 months prior to writing this article, NVIDIA shares were priced at $181. This means that the stocks have grown by 183% in the past year alone.
Your capital is at risk.
What are Growth Stocks?
In a nutshell, growth stocks are publicly-listed companies that are expected to outperform the wider markets. This might include companies operating in the same sector or industry, or a benchmark index like the FTSE 100.
Either way – and as the name suggests, growth stocks are expected to be worth a lot more in the future. As a result, although the company in question might not be making much in the form of profit, investors flock to high growth stocks because of the expected future cash flows.
Tesla – the electronic car maker, is a fine example of a growth share. This is because the firm has a market capitalization of over $276 billion – even though it is only just about making a profit.
The overarching objective of investing in growth stocks is that you expect to see an above-average return in the coming years. For example, those that backed companies like Apple and Microsoft in the 1980s are now looking at unprecedented returns. This is because they took a “punt” that in decades to come, the firms would be market leaders in their respective sectors.
Characteristics of Growth Stocks
Before you invest in growth stocks, it is important that you have a firm grasp of how they differ to more traditional stocks. As such, below you will find some of the main characteristics that growth stocks possess.
High P/E Ratio
A common denominator across most growth stocks is that they carry a high P/E ratio. For those unaware, the price-to-earnings (P/E) ratio looks at the share price of a company against its earnings per share.
The resulting figure gives us an idea of whether the company is potentially over or undervalued. The general rule of thumb is that the higher the P/E ratio, the more chance there is that the stock is overpriced.
As we will uncover shortly, high growth stocks typically have a very high P/E ratio. This is because they may not be making much profit – even though they have a sizable share price and market capitalization.
So, let’s take Tesla as a prime example.
- Tesla has a current share price of $1,487
- Its most recent earnings per share was $1.92
- This means that Tesla has a P/E ratio of 774x
As noted earlier, we need to look at how the P/E ratio of a growth share compares against its fellow industry counterparts. A good way of doing this is to look at the average P/E ratio of the NASDAQ exchange. This is where some of the largest tech stocks in the world are listed – including Tesla.
At the time of writing, companies listed on the NASDAQ have an average P/E ratio of 27.29x. In the eyes of a novice, this means that Tesla is heavily overvalued. After all, it is trading at 28 times the industry average.
Leading on from the above section on growth stocks having a high P/E ratio, this is typically because the firm is yet to realize its full potential in the profit department. This is why the P/E yields a ratio that makes the company look overvalued. A good growth stocks example is Netflix.
The online content streaming provider has grown to exponential heights over the past few years. Not only in terms of subscriber numbers, but its stock price and market capitalization, too. For example, although Netflix is reporting a profit, free cash flow levels are in negative territory.
As a result, the firm will likely need to raise additional cash to meets its long-term goals. With that said, Netflix has a market capitalization of over $221 billion – making it one of the most valuable tech stocks in the US. Once again, this is because investors believe that in the near future, Netflix will be yielding significantly higher profits than it is currently generating.
Innovative Business Models
An additional characteristic that you will often find with growth stocks is that they are typically behind innovative products or services. This might include a form of renewable energy like solar, or even a cutting-edge technology like the blockchain. Additionally, the firm might be involved in electric vehicles or even cannabis-based medicine.
Either way, although these products and services have the potential to make it big in the future, there is no guarantee that this will be the case. Even if the underlying sector does reach the masses, there is no guarantee that your chosen stock will be the one to lead the way.
Growth stocks rarely pay dividends. The overarching reason for this is that growth stocks re-invest most of their profits back into the company. From an investment perspective, this means that you will only be able to make money in the form of capital gains.
In Layman’s terms, this means that your main objective is to sell the shares at a much higher price than you paid. Interestingly, although Amazon is the most valuable company in the US, it is actually referred to as a growth share.
This is evident by the fact it has a substantially high P/E ratio of over 120 times and is yet to pay a single cent in dividends. But, it is important to remember that Amazon is involved in heaps of side-ventures that are yet unproven. This includes everything from artificial intelligence, cloud computing, online groceries, and drone-based deliveries.
AIM Growth Stocks
Although not an exact science, it should be noted that the vast majority of growth stocks in the UK are listed on the AIM. This does make sense when you consider the exchange is for smaller companies, or those that are still up and coming. Only when a publicly-listed company meets certain conditions will it then make the transition to the London Stock Exchange.
As a result, if you want to get your hands on the best UK growth stocks, you might need to focus on AIM shares. The key problem with this is that most AIM shares never reach their full potential. There are countless examples of stocks that have enjoyed a brief period of success, only to then see their share price capitulate.
The good news for you is that there is a simple solution. That is to say, rather than going through the motions of attempting to find a hidden gem, you can instead invest in the wider AIM markets via an ETF. Put simply, this means that you will be buying shares in each and every company listed on the AIM. That way, you can diversify across the entire market, as opposed to picking a handful of shares.
Why Invest in Growth Stock?
Put simply, people invest in high growth stock because they think the underlying stock price is likely to grow over time. More specifically, there is an expectation that the shares will increase in value at a much faster rate than the market average. This is usually because you are investing in a company while it is still young. In other cases, the company might be behind a product or service that is yet to fully take off.
A prime growth stocks example of this is the online retailer ASOS.
- The firm was launched in 2000 and went public in 2001 via the AIM.
- Back then, online fashion was still in its infancy are largely unproven with consumers.
- As a result of this, had you invested in ASOS before the platform became a house-hold name, you would have paid an initial price of 24p per share.
- Fast forward to its all-time highs of 2018 and would have been able to sell the shares at 7,630p.
- In doing so, you would be looking at gains of over 31,000%.
Crucially, there was no guarantee that ASOS would make it big back in 2001, which is why the risk vs reward ratio is so high.
Value shares and growth stocks are chalk and cheese in the investment arena.
- Value shares are often referred to as ‘undervalued’, as they are trading at a price below their intrinsic value.
- Growth stocks can be viewed as expensive and overpriced, not least because they carry high P/E ratios.
In the case of value shares, you do stand the potential of buying the shares are a favourable price. This might be because the shares have dropped in value on the back of a negative news story or a below-par earnings report. Either way, the share price drop is usually short-lived in such instances.
The key point is that value shares are typically established organizations. The value not only comes in the form of a reduced share price, but also because they often pay dividends.
This allows you to grow your money even faster. On the other hand, growth stocks rarely pay dividends, and they carry overvalued P/E ratios. But, the key attraction is that the shares could one day be worth considerably more.
With this in mind, seasoned investors will often have a vested interest in both value shares and growth stocks. This diversification strategy ensures that you have a finger in multiple pies. That is to say, while you are in possession of firms that have the potential to grow over time, you also own value shares that can reward you in the short-to-medium term.
Risks of Growth Stocks
While the main attraction of growth stocks is that they offer the potential to earn above-average returns in the long run, they do come with added risks.
Growth stocks are typically behind innovative business models that look great on paper. This is why their shares trade at a premium. However, it is important to remember that there is no sure-fire way of knowing whether or not the firm will succeed with its long-term goals. This became evident during the Dot Com crash of the early 2000s.
During the bubble, dozens of newly launched internet companies acquired a multi-billion pound market capitalization – even though many were yet to report a single penny in profit. Once the crash came to fruition, it was inevitable that many of these firms would eventually get found out by the markets.
In turn, they are no longer here to tell their story. This is the reality with growth stocks, so never assume that an innovative business model is guaranteed to enjoy success in the future.
As we have discussed throughout this guide, many growth stocks have a multi-billion pound valuation even if when they are generating small profits. In some cases – such as Uber, growth stocks will actually be making a loss. The key problem here is that shareholders will not hang around forever.
That is to say, if the growth share in question releases its earnings report, and the figures are substantially worse than expected, this could result in a mass sell-off. Going back to the case of Uber, its 2019 IPO opened at a share price of $42. As of August 2020, the stocks are priced at just $33. This means that the firm is worth 21% less than its initial listing price.
Competition can be Costly
When up and coming growth stocks are working on an innovative product or service, there are often several companies active in the space. This means that competition can be fierce. However, an even greater risk in this respect is that growth stocks also need to contend with established companies that already have vast resources at their fingertips.
A prime example of this is the GPS market. Back in the early 2000s, GPS was billed as the best thing since sliced bread. As you might well remember, TomTom was at the forefront of the market. As a result, its shares grew from 27 Euros in 2005 to 95 Euros in 2007 – representing growth of over 250%.
However, mobile phone providers like Apple and Google then stepped in by making GPS maps a core feature of their devices. In turn, TomTom shares have been on a downward spiral ever since their 2007 peaks, with a current market price of just 7 Euros. This means that the stocks are worth 92% less than their prior highs.
Where to Buy Growth Stocks
So now that you know both the advantages and disadvantages of growth stocks, we are now going to explore where you can make a purchase. As most growth stocks are listed on the AIM, you need to find a broker that gives you access to this particular marketplace.
Furthermore, you also need to explore what fees and commissions the broker charges, what shares it actually offers, and whether it is regulated by the Financial Conduct Authority (FCA).
To help point you in the right direction, below you will find a selection of UK stock brokers that allow you to buy growth stocks in the UK.
1. eToro – Buy Growth Stocks with Zero Commission
eToro has been leading the UK stock broker space for some time now. One of its main selling points is that the platform can be used by people of all skill levels. Whether you are a seasoned investor or a newbie looking to make your first-ever investment – eToro has you covered. The online broker offers an extensive stock library that consists of 800+ shares, including many of the best shares to buy.
This includes heaps of firms listed in the UK, as well as international shares. For example, you can invest in stocks of firms listed in the US, Canada, Hong Kong, Sweden, and even Saudi Arabia. Regardless of which market you wish to invest in, eToro allows you to buy shares on a commission-free basis.
This is somewhat unprecedented in the online share dealing space, so the platform is great if you are looking to keep your costs to a minimum. What we also like about eToro is that you can start off with really low stakes. For example, minimum deposits amount to just $200 (about £160) and you can buy shares in a company from just $50. This is the case irrespective of how much the shares cost, as eToro supports fractional ownership. Additionally, eToro is popular because of its Copy Trading feature.
As the name suggests, this allows you to copy the portfolio of a seasoned eToro investor. You can also mirror their trades moving forward. If you like the sound of eToro, you can easily deposit funds with a UK debit card, credit card, bank account, or e-wallet. You will incur a small 0.5% currency conversion fee, as eToro is denominated in US dollar. Your money is safe at the broker too, as eToro is licensed by the FCA. Your funds will also be protected by the FSCS scheme.
75% of retail investor accounts lose money when trading CFDs with this provider.
2. IG – Trusted UK Share Dealing Platform With 10,000+ Stocks
IG is also popular with UK investors that are looking to buy growth stocks. After all, the broker gives you access to over 10,000 stocks at the click of a button. This includes hundreds of UK companies listed on the London Stock Exchange and AIM, so there are plenty of opportunities to build a diversified portfolio. Much like eToro, IG also gives you access to international stock exchanges.
On top of its traditional share dealing services, IG also supports CFD stock trading and spread betting. This is useful if you wish to trade high growth stocks with leverage, or you plan to engage with short-selling. When it comes to fees, IG allows you to invest in shares at £8 per trade. This means that you will pay £8 when you buy the shares and again when you sell them. The amount you invest is irrelevant, as the fee remains constant.
You can, however, get your trading fees down to £3 if you placed more than 3 orders in the prior 30 days. CFD and spread betting fees trading fees are slightly different, as you will pay a commission of 0.10%. This comes at a minimum of £10. In joining 178,000 IG clients, you will be able to invest via the platform’s main website, MT4, or on your mobile phone. This ensures that you are able to buy and sell growth stocks no matter where you are.
In terms of the specifics, IG was launched back in 1974 – making it one of the most established brokerage firms in the space. Its parent company is listed on the London Stock Exchange, with a current market capitalization of £2.7 billion. It does, of course, hold several brokerage licenses – including that of the FCA. This ensures that you are able to trade in a safe and secure environment at all times.
How to Invest in Growth Stocks
So now that we have covered some of the best stock trading sites to buy growth stocks, we now need to show you how the investment process works. Fortunately, online share dealing accounts like eToro allow you to make an investment with ease. In fact, the end-to-end process of opening an account, depositing funds, and buying shares can be completed in minutes!
Here’s what you need to do:
Step 1: Open an Account and Upload ID
All online stock brokers require you to open an account. As such, head over to the eToro website and click on the ‘Sign Up’ button.
In doing so, you will be asked to enter some personal information.
This includes your:
- Full Name
- Home Address
- Date of Birth
- National Insurance Number
- Contact Details
eToro requires all new account holders to upload some ID.
This includes your:
- Passport or driver’s license
- Proof of address – Utility bill or bank account statement
If you don’t have the documents to hand, you can still proceed with your growth share purchase. However, you will be limited to a deposit of 2,000 Euros – which is about £1,800.
Step 2: Deposit Funds
You will now need to deposit some funds. Minimum deposits stand at $200 (about £160) and come with a 0.5% conversion fee.
You can choose from the following payment methods:
- Debit card
- Credit card
- Bank Transfer
Your deposit will be credited to your eToro account instantly – unless you are using a bank account.
Step 3: Buy Growth Stocks
You are now ready to invest in growth stocks. Once you know which company you wish to buy stocks in, enter it into the search box at the top of the screen. In our example, we are looking to buy shares in growth stock ASOS.
Then, you need to click on the ‘Trade’ button. In doing so, an order box will populate on your screen.
To complete the investment process, you need to enter the amount that you wish to invest (in USD) and click on the ‘Open Trade’ button.
Growth stocks come with both their pros and cons. On the one hand, you stand the chance of investing in a company at the very start of its journey. Although you might need to pay a premium in terms of its P/E ratio, it is hoped that in the near future the shares will be worth considerably more.
On the other hand, there is never any guarantee that your chosen growth stocks will reach their full potential. This is why it’s crucial that you perform in-depth research before making an investment.
If you have located a growth share that you like the look of, you can invest at eToro without paying any commission. Simply click on the link below to get started with a purchase now!
eToro – Buy the Best Growth Stocks with No Commission
How do growth stocks work?
Growth stocks work much the same as any other share investment. That is to say, you buy the shares with the hope that they will be worth more in the future. If they are, you will make a profit when you sell them.
How to value growth stocks?
It can be difficult to value growth stocks, as much of the valuation is based on the firm's perceived future value. This is because many growth stocks are yet to realize their full potential.
Why do growth stocks have a high P/E ratio?
The P/E ratio looks at the firm's earnings in relation to its current stock price. As high growth stocks typically have low earnings and a high stock price, this results in a high P/E ratio.
Where are growth stocks listed?
Most growth stocks in the UK are listed on the AIM, as this is the exchange that hosts small and up and coming companies.
What is the minimum amount I can invest into growth stocks?
Minimum investments depend on your choice of broker. In the case of eToro, this stands at just $50 (about £40).
Last Updated on