Growth Stocks in algo trading
The world of quantitative trading is vast and diverse, and among its many concepts, growth stocks occupy a prominent place. These stocks, often associated with innovative, high-growth companies, are at the heart of many algo trading strategies. Let's find out together what growth stocks are and how they can be integrated into the world of algorithmic trading.
Definition of Growth Stocks
A growth stock is a company that is expected to grow much faster than the market average. These companies typically reinvest all their earnings to drive short-term growth, making these stocks riskier. Investors seek capital gains by selling their shares later at higher prices. To be classified as a growth stock, a company should post a return on equity of at least 15%.
Growth stocks differ from value stocks. Value stocks are often undervalued or ignored by the market, but can ultimately gain in value. Unlike growth stocks, they generally pay dividends. Value stocks tend to trade at a low P/E ratio.
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Main characteristics of Growth Stocks
- No dividends: These stocks generally do not pay dividends, as companies prefer to reinvest all earnings to accelerate growth.
- High Risk: The risk associated with these stocks is higher than average, because if the company does not perform as expected, investors may suffer a loss when selling their shares.
- High Price/Earnings (P/E) ratio: These stocks often trade at a high P/E ratio. However, if the company continues to grow rapidly, the share price could rise, making the current P/E ratio attractive in retrospect.
Growth stock example: Amazon Inc.
Amazon (AMZN) has long been considered a growth stock. In 2021, it is one of the world's largest companies. Historically, Amazon shares have traded at a high P/E ratio. Despite the company's size, EPS growth for 2022 is estimated at over 67%.
The risk associated with growth stocks
While growth stocks offer significant potential returns, they are also associated with higher risks. If the company fails to deliver the expected growth, the share price can fall considerably.
Growth stocks and Algo Trading
In the context of algo trading, growth stocks can be targeted using algorithms that analyze various parameters such as growth forecasts, financial ratios and market trends. These algorithms can help traders identify promising growth stocks and optimize their trading strategies.
Growth stocks offer a tempting opportunity for investors seeking high returns. However, they come with their share of risks. In the world of algo trading, where decisions are made in a fraction of a second, understanding the nuances of growth stocks is crucial to maximizing returns while effectively managing risk.
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