A growth stock is a type of stock that is characterised by a company that is expected to grow at an above-average rate compared to the overall market or industry. These companies typically reinvest their earnings back into the business to fuel growth, rather than paying out dividends to shareholders. As a result, growth stocks are often associated with high-growth companies in sectors such as technology, healthcare, and biotechnology, and they tend to have high price-to-earnings (P/E) ratios.
Investors in growth stocks are typically looking for companies that have the potential for high earnings and revenue growth, rather than companies that pay high dividends. They are willing to pay a premium for a share of a company that they believe will grow faster than the market.
Some common characteristics of growth stocks include:
- High P/E ratios: Growth stocks tend to have higher P/E ratios than other stocks, as investors are willing to pay more for the potential for higher earnings growth.
- High revenue and earnings growth: Growth stocks are expected to have higher revenue and earnings growth than the market or industry average.
- Low or no dividends: Growth companies often reinvest their earnings back into the business to fuel growth, rather than paying out dividends to shareholders.
- Volatility: Growth stocks can be more volatile than other stocks, as their prices are more sensitive to changes in earnings and revenue growth.
It’s worth noting that growth stocks are considered a higher-risk investment, as they are dependent on the company’s ability to grow and maintain that growth, if the company’s growth prospects change or if the company doesn’t meet analysts’ expectations, the stock can drop significantly. Also, growth stocks can be more volatile, and often require a longer investment horizon as well.« Back to Financial Terms Index