Growth stocks may appear in any sector or industry and typically trade at a high price-to-earnings (P/E) ratio. They may not have earnings at the present moment but are expected to in the future.
Investment in growth stocks can be risky. Because they typically do not offer dividends, the only opportunity an investor has to earn money on their investment is when they eventually sell their shares. If the company does not do well, investors take a loss on the stock when it’s time to sell.
Growth stocks tend to share a few common traits. For example, growth companies tend to have unique product lines. 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 patents as a way to ensure longer-term growth.
Because of their patterns of innovation, they often have a loyal customer base or a significant amount of market share in their industry. For example, a company that develops computer applications and is the first to provide a new service may become a growth stock by way of gaining market share for being the only company providing a new service. If other app companies enter the market with their own versions of the service, the company that manages to attract and hold the largest number of users has a greater potential for becoming a growth stock.
Many small-cap stocks are considered growth stocks. However, some larger companies may also be growth companies