Investing in growth stock companies doesn’t come without risk. That’s why investors need to recognize the primary types of growth stocks and follow proven tips for lowering risk.

Growth stocks can be top performers while the companies are expanding. However, a single quarter of bad earnings can send them into a slide. The best of the growth stocks, though, have sound fundamentals and a strong hold on a growing market. That lets them bounce back a lot faster when markets have fallen.

Here are some tips for finding those lower-risk growth stocks, and cutting your overall risk:

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7 tips for Successful Investors to reduce their risk while investing in growth stock companies

1. Don’t overindulge in aggressive investments. We recommend limiting your aggressive holdings to a smaller part of your overall portfolio. Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth stock strategy.
2. Be skeptical of growth stock companies that mainly grow through acquisitions. Your growth investing strategy shouldn’t automatically discount companies that have grown through acquisitions. However, while making acquisitions can speed up a company’s growth, it also adds risk that can undermine a conservative, safe investing approach.
3. Look for growth stocks that have a strong brand and reputation. Customers keep coming back to these businesses, and will try their new products.
4. Keep an eye out on a growth stock’s debt. It should be manageable. When bad times hit, debt-heavy growth stock companies go broke first. This is one of the best ways you can mitigate risk in your own growth investing strategy.
5. Keep stock market trends in perspective. It pays to keep in mind that the stock market often anticipates trends—but no trend lasts forever. As well, stocks sometimes suffer lengthy downturns due to business and economic problems—but the stock market downturns typically go into reverse long before the problems get resolved.
6. Balance your cyclical risk. If you can find a growth stock that has freedom from business cycles, that’s a plus for your portfolio balance. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to follow our Successful Investor approach and diversify in most if not all of these sectors: utility, finance and consumer stocks, along with resources and manufacturers.
7. Top growth stocks have the ability to profit from secular trends. These trends outlast ordinary business booms and busts, because they reflect ongoing social change. An expanding middle class worldwide and rising environmentalism are just two examples of secular trends.

When it comes to building a growth investment strategy, don’t let sound bites and nebulous predictions warp your stock trading decisions. Instead, minimize your portfolio risk by following our three-part strategy Successful Investor philosophy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors; and avoid stocks in the broker/media limelight.

 Bonus Tip: Here’s a closer look at two types of growth stock companies

1. Small-cap Stocks

The market capitalization is the total value of all a company’s outstanding shares. It is calculated by multiplying the number of shares outstanding by the market price of a single share. There is no universal definition for a “small cap” company compared to a micro-, mid- or large-cap company. In general though, any company with a market capitalization of between $250 million and $1.2 billion is considered to be a small-cap firm.

Growth stock companies in this category are often still in their early phases of growth. The value of their shares has the potential to increase significantly. Small-cap stocks in some cases post higher returns than blue-chip stocks, but they are generally more volatile. They also carry a higher degree of risk.

2. Technology and Healthcare Stocks

 Investors who seek a growth stock with strong potential often look for companies that develop new technologies or offer innovations in healthcare. The stocks of companies that develop popular or revolutionary products can rise exponentially in price over a relatively short period of time. However, you need to choose stocks that meet our Successful Investor criteria.

 Growth stocks can offer good returns, but they can be risky investments. What advice would you give to young investors interested in growth stocks?