Growth stocks are companies whose earnings growth is expected to be above the market average. These firms often pay little or no dividends. Instead, they invest any extra money in furthering their growth.

These stocks are long-term investments. They can be well-known stars or quiet gems, but they share the common trait of growing at a higher than average rate within their industry, or within the market as a whole.

(You can get all the details on how to select appropriate stocks for your portfolio in our new special report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.” Click here to download this free report and get started right away.)

It pays to know the difference between momentum stocks and growth stock picks

It’s common for investors to confuse growth stocks with momentum stocks. Like growth stocks, momentum stocks are moving highly in the market. But unlike growth stocks, the overall goal from momentum trading is to profit from shorter-term trades. Momentum investors are particularly keen on the so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.

They view a “negative earnings surprise” — lower-than-expected earnings — as a sell signal. They use a variety of computerized formulas to make buy and sell decisions, but all come down to “buy on strength and sell on weakness.” So they tend to pile into the same stocks all at once, and the gains that follow are something of a self-fulfilling prophecy.

The trouble is that when the stock’s rise falters, momentum investors also try to get out as a group, but there are never enough buyers. That leads to violent price fluctuations in the stock’s price.

For a rising portfolio Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor. Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Value stocks can offset risk in your growth stock picks

Most successful investors own some growth stock picks and some value stocks at any given time, depending on where they see the best opportunities.

Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many technology stocks, such as Microsoft (symbol MSFT on Nasdaq), started as growth stock picks, but have begun the transition into value stocks.

Growth stocks plus value stocks can make a winning combination. A growth stock can be a top performer when the company is growing. However, a single quarter of bad earnings can send it into a deep, but often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by suddenly shooting up when their true value is discovered.

Our system automatically blends growth and value

If you invest as we advise (by spreading your investments out across the five main economic sectors, investing mainly in well-established companies and downplaying stocks that are in the broker/public relations limelight), you will automatically buy some growth stocks and some value stocks.

That helps you achieve good results while holding down volatility. But in the end, we think the relative amounts you invest in value and growth stocks should be secondary to your portfolio’s diversification and overall investment quality.

As a member of TSI Network, you may have already seen Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada. If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share the report with a friend. It’s my “thank you” just for signing up for my free daily updates.