A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they eventually sell their shares in the future.
KEY TAKEAWAYS
- Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average.
- Growth stocks often look expensive, trading at a high P/E ratio, but such valuations could actually be cheap if the company continues to grow rapidly which will drive the share price up.
- Since investors are paying a high price for a growth stock, based on expectation, if those expectations aren’t realized growth stocks can see dramatic declines.
- Growth stocks typically don’t pay dividends.
- Growth stocks are often put in contrast with value stocks.