There are hundreds of UK growth stocks I could consider buying with my hard earned cash. The nature of these stocks is that most of them are higher risk investments but with high potential for stock price appreciation.

Get the right one and it could be like buying Nvidia stock in 2019. Get it wrong and the company could go broke. Here are the mistakes I now try to avoid when choosing.

Rating check

The first is to look at evaluation metrics. For example, consider Car dealer (LSE: AUTO). I have owned the stock in the past but do not currently own it. Shares are up 12% over the past year. Given its long-term share price appreciation, I’d say many see it as a UK growth share.

The increase in revenue in recent years shows that the company is enjoying a strong period. Revenue in 2020 was £262.8m. It has grown every year since then, with 2023 results (published earlier this year) showing revenues of £570.9 million. Net profit also increased during this period.

So far, so good. However, let’s look at the price-earnings ratio. It’s 26.82. By comparison, the FTSE 100 the average ratio is 14.64. So Auto Trader is almost twice as expensive as the average stock in the index. Of course, not all companies do as well as Auto Trader. But in my view, it makes the stock potentially overvalued.

The risk to me is that if I were to buy it now, the share price could drop over the next year to reflect a more accurate value.

Ignoring short-term noise

Another mistake I try to avoid is confusing speculation with authenticity interest of long-term investors. Growth stocks naturally attract a lot of attention, even from short-term traders looking to make a quick buck. There is nothing wrong with that, but it can distort the share price for a while.

These quick money buyers can trade the stock and sell it in just a few days. As a result, the stock can be volatile and erratic. I want to be careful not to be lured into buying just because of a spike. Rather, if this is just speculative buying based on rumours, the share price will likely fall.

Instead, I want to look beyond the noise and look for companies that are attracting investors for the right reasons.

Small print hunting

Finally, I want to look outside of the main large-cap stock fund to try to find some serious growth potential. I used to just stick to the FTSE 100. Although this is safer in some ways, the companies in the index already have multi-billion market caps. This means that it will be harder to get explosive share price growth in the future.

Rather, if I look in FTSE 250 or even small-cap names, there’s more potential to win if all goes well. I have to be aware that buying small cap or penny stocks has a lot more risk. However, given the low market cap, this is the area I think has the best potential.