Growth investors typically look for investments in rapidly expanding industries (or even entire markets) where new technologies and services are being developed. Growth investors look for profits through capital appreciation—that is, the gains they’ll achieve when they sell their stock (as opposed to dividends they receive while they own it). In fact, most growth-stock companies reinvest their earnings back into the business rather than paying a dividend to their shareholders.
These companies tend to be small, young companies with excellent potential. They may also be companies that have just started trading publicly. The idea is that the company will prosper and expand, and this growth in earnings or revenues will eventually translate into higher stock prices in the future. Growth stocks may therefore trade at a high price/earnings (P/E) ratio. They may not have earnings at the present moment but are expected to in the future. This is because they may hold patents or have access to technologies that put them ahead of others in their industry. In order to stay ahead of competitors, they reinvest profits to develop even newer technologies, and they seek to secure patents as a way to ensure longer-term growth.
Because investors seek to maximize their capital gains, growth investing is also known as a capital growth strategy or a capital appreciation strategy.