Buying shares in small companies with excellent potential can be an incredibly rewarding long-term strategy. Holding these kind of shares in an ISA would be even better, since any capital gains or income won’t be taxed.  

With this in mind, let’s look at three hot growth stocks and ask whether you should make room for them in your portfolio.

Purple patch

Online estate agent Purplebricks (LSE: PURP) announced its first set of annual results this morning. Group revenues were up 448% (£18.6m) and gross profits rose by a 427%. The company sold £2.8bn of property in the last 12 months and visits to its website grew to 1.23m by April from 0.4m the previous year.

Much of Purplebricks’s appeal lies in its disruptive business model. In contrast to traditional agents charging a percentage of a property’s sale value, sellers pay a fixed fee for all marketing and administration. Instead of having its own agents, the company offers a flexible service using Local Property Experts (LPEs) who are able to work any day of the week and in the evenings. LPE recruitment is now ahead of plan and increased by 159% over the past year.

Although more established players are starting to adapt, Purplebricks is arguably streets ahead and is now looking to launch in Australia. Unsurprisingly, this advantage (and the potential for massive returns) is factored into the company’s vertigo-inducing valuation. It could be argued that there is far more chance of it disappointing shareholders and the market than succeeding. Then again, wasn’t the same thing said about ASOS and ARM Holdings?

Time to get serious?

Despite the odd bit of director dealing and updates about preferred contractors, fertilizer-producer, Sirius Minerals (LSE: SXX) hasn’t provided the market with much to feed on since the publication of the report from its definitive feasibility study in March.

This situation could change dramatically with confirmation that its harbour facilities have been approved and an announcement relating to the funding of the actual mine. Investors will be focusing on the AGM on June 24 (yes, the day after the EU referendum vote) and hoping for news from CEO, Chris Fraser.

Although a lot of work is clearly going on behind closed doors and the investment case has looked more positive in recent months, let’s be clear —  this is no ‘safe’ and dependable FTSE 100 stock (for now). Even just the suggestion that the board is struggling to raise funding for the mine could see the shares plummet.

As a current shareholder with retirement a few decades away, I’m willing to endure the roller-coaster ride ahead. However, Sirius forms only a small part of my diversified ISA portfolio — and for good reason.

Giving investors cheer

Before this week, (LSE: BOO) had been making its investors very happy indeed. A strong and sustained rise in the share price was further boosted by last week’s trading update. Revenue has jumped by 41% and overall gross margin is up 56%. The company now has 4.2 million active customers, a 30% increase on last year and expects sales growth of 25-30% for the financial year. The £61m cash on its balance sheet is also encouraging.

Too hot for some

Investing in fast-growing, dynamic businesses can be extremely profitable, especially for investors who are able to spot gaps in the market and buy the shares before the herd arrives. Holding these shares in a tax-free wrapper could lead to even greater gains.

However, this kind of investing is not for everyone. As this week has shown, shares like these can rise or fall by high single digit percentages on some days. So, before adding a slice of Purplebricks, Sirius Minerals, or any young company to your ISA portfolio, it's vital that you consider your own investing horizons, financial goals, required return and attitude to risk. While the share prices of some young companies can double or triple very quickly, many others struggle to keep going and can lead to heavy losses. Only invest what you're willing to lose.

That said, if buying fast-growing shares flick your investing switch, you may be interested in a special FREE report written by the experts at the Motley Fool. It highlights a top small-cap share they believe could offer a potential upside of as much as 50%, despite having already delivered a powerful return for its holders.

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Paul Summers owns shares in Sirius Minerals and The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.