Advantages and Disadvantages of Growth Stocks
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Advantages and Disadvantages of Growth Stocks
Like all stocks, there are upsides and downsides to stocks.
Things To Know
- Advantages: potential for investment gains and deferred taxes.
- Disadvantages: little if any current income, risk of loss of principal.
The upsides
The big advantage of growth stocks, naturally, is the increased potential for large investment gains. This potential applies not only to short-term gains but long-term growth as well. Historically, growth stocks have reported higher returns over time than other stocks and other types of investments.
Another advantage stems from the fact that your returns are largely in the form of increased market value, not current income. This means that you can defer paying taxes on your gains until you sell your stock. In contrast, you pay taxes on stock dividends in the year you receive them.
The downsides
On the other side of the coin, growth stocks provide little, if any current income; so if you need your investments to pay a regular income, you may want to look at different investment options. Of course, the big disadvantage of growth stocks is the greater risk of loss of principal. When you purchase income stocks or other stocks that are growing in value more slowly, there is often less risk to your investment. In general, the higher the potential returns, the greater the risk.
