Growth stocks are stocks of companies that are expected to grow at a rate much higher than the industry average, particularly when it comes to their revenue and profits. And although it's not uncommon to find growth stocks that don't currently make a profit, it's often because they spend a lot growing the business in its earlier stages to set it up for future profits.

Investors gravitate to growth stocks because fast-growing companies often translate to fast-moving share prices. If you're interested in growth stocks and have $5,000, here are two smart buys.

Spotify

Not only has it been a rough year for Spotify Technology (SPOT -4.62%) (it's down over 67% year to date as of Nov. 28), but it's been a roller-coaster ride for the music streaming giant since it went public in April 2018. Since its initial public offering (IPO), Spotify's stock is down just over 47%, even though it had more than doubled by February 2021. This latest drop is partly due to the company's disappointing earnings, but that shouldn't deter long-term investors.

In its third quarter, Spotify reported a $228 million operating loss, but the one silver lining is that the company also spent $386 million on research and development during that time, $178 million more than its 2021 third quarter. Spotify's large investments in podcasts and audiobooks may be cutting into profits right now, but those same investments are why it's a smart buy at current prices.

Looking past the unprofitable quarter, what should signal better days ahead is Spotify's growing user base. It has 456 million monthly active users (up 20% year over year), with 195 million paying for premium service (up 13% year over year). As Spotify continues to expand its users and reap the returns on its podcasts and audiobook investments -- both of which have better profit margins than music streaming -- it has a solid long-term outlook.

Block

Block (SQ -2.28%) (formerly Square) hasn't been immune to this year's bear market, down over 60% year to date and more than 76% from its August 2021 highs. At the current prices it's hovering around, Block's stock looks much more appealing when considering its long-term outlook and impressive financials. Block made $1.57 billion in profit in its third quarter, up 38% year over year.

While it's most known for its Square business, which caters to small and medium-sized businesses by providing payment processing and point-of-sales hardware, its growth potential may be reliant on the success of its Cash App segment. Cash App is a personal finance app that allows users to transfer money, buy stocks and cryptocurrency, and get their own debit card linked to the app. It's on its way to becoming a one-stop shop.

Square made $783 million in profit in the third quarter (up 29% year over year), but Cash App's profit increased 51% to reach $774 million. There's arguably no personal finance app that does a better job servicing the underbanked population, and as Cash App's banking offerings continue to expand, it'll only deepen the connection it has with its users and increase revenue opportunities.

Both Block's Square and Cash App segments have much room for growth (it only operates in the U.S., Canada, Australia, Japan, the United Kingdom, Ireland, France, and Spain), and although 2023 may be a trying year because of broader economic conditions, the future looks bright beyond that.

Break the investments down

I would divide the $5,000 evenly between both stocks, but I would avoid investing the full amount at once. Instead, I would use dollar-cost averaging, which involves investing specific amounts at set intervals regardless of how stocks are performing at the time. For example, here's how you could break down the $2,500 with each stock:

  • 10 weekly investments of $250
  • 5 bi-weekly investments of $500
  • 2 monthly investments of $1,250

The frequency of your investments isn't as important as making sure you stick to the schedule you set. Dollar-cost averaging helps you avoid trying to time the market or investing a lump sum right before the market declines. The goal is to remove as many emotions from investing as possible and trust it'll even out in the end -- with much less stress along the way.