Growth stocks are companies that are expected to have earnings growth above the market average. Frequently, growth stocks pay little or no dividends, instead re-investing any extra money to promote further growth.

These are not to be confused with momentum stocks. Momentum stocks are stocks that are moving higher in the market. While individual definitions may differ, 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’, 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.

Momentum investing theory can be summed up as “buy high, sell higher”. 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. This leads to violent price fluctuations.

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.

Growth stocks are longer-term investments. Some growth stocks are not even widely recognized. 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. Many technology stocks started as growth stocks, but have begun the transition into value stocks.

Most successful investors own some growth stocks and some value stocks at any given time, depending on where they see the best opportunities. The two can make a good combination. Growth stocks can be top performers when the company is in fact growing. However, a single quarter of bad earnings can send a growth stock 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 through spinning off of hidden assets or some other manner.

Value stocks are stocks trading lower than suggested by their fundamentals. These stocks are perceived as undervalued and have the potential for a price increase.

By combining growth and value in a portfolio, you can achieve good results while holding down volatility.

If you take account of your own financial and personal circumstances and temperament, and if you invest as we advise (diversifying across the five main economic sectors, while confining your investments mainly to well-established companies), you will automatically buy some growth stocks and some value stocks; you will also automatically buy some small-company stocks and some big-company stocks. However, the economic-sector diversification and overall investment quality of your portfolio are far more important than the relative amounts you invest in value, growth and small stocks.