Growth Stocks

Growth Stock FAQs

What Is Considered to Be a Growth Stock?

When it comes to stocks, “growth” means that the company has substantial room for capital appreciation. These tend to be newer and smaller-cap companies, and/or those in growth sectors like technology or biotech. Growth stocks may have low or even negative earnings, often making the high P/E stocks.

Are Growth Stocks Risky?

As with all investing, there is a fundamental trade-off between risk and return. Growth stocks provide a greater potential for future return, and are thus equally matched by greater risk than other types of investments like value stocks or corporate bonds. The main risk is that the realized or expected growth doesn’t continue into the future. Investors have paid a high price expecting one thing, and not getting it. In such cases, a growth stock’s price can fall dramatically.

What Is an Example of a Growth Stock?

As a hypothetical example, a growth stock would be a biotech startup that has begun work on a promising new cancer treatment. Currently, the product is only in the Phase I stage of clinical trials, and there is uncertainty whether the FDA will approve the drug candidate to continue on to Phase II & III trials. If the drug passes, and is ultimately approved for use, it could mean huge profits and capital gains. If, however, the drug either doesn’t work as planned or causes severe side effects, all of that R&D spending may have been in vain.

How Do You Know If a Stock Is Growth or Value?

Instead of looking to future growth potential, value stocks are those that are thought to trade below what they are really worth and will thus theoretically provide a superior return as their stock prices catch up with fundamentals. Unlike growth stocks, which typically do not pay dividends, value stocks often have higher than average dividend yields. Value stocks also tend to have strong fundamentals with comparably high price-to-book (P/B) ratios and low P/E values—the opposite of growth stocks.

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