Growth Stock

Loading the player...

What is a 'Growth Stock'

A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the market.

A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Growth investors choose stocks based on the potential for capital gains, not dividend income, so they can be risky.

BREAKING DOWN 'Growth Stock'

Technology companies are typically good examples of growth stocks because the opportunity for advancement is virtually limitless. However, growth stocks also carry a lot of risk because shareholders rely solely on the company's success to generate return on their investment. If the company's growth is not what was expected, shareholders may end up losing money as market confidence wanes and share prices drop.

Characteristics of Growth Stocks

While many promising small-cap stocks may be considered growth stocks, not all growth stocks are issued by small companies. One competitive advantage that is common among growth stocks is manufacturing scale. Because producing many items is typically cheaper than manufacturing just a few, the economies of scale enjoyed by larger companies often mean that they can keep more of their revenues as profit, accelerating growth.

Growth stocks also often share a few other common traits that are independent of company size. Growth companies typically either have a very loyal customer base or a firm grasp on the majority market share. This could mean that the company is the first to offer a given product or service (likely a smaller company in a newer industry), or that it is simply the most popular company among many (a large company dominating its market).

Growth companies also typically have unique or advanced product lines. A growth company may hold a patent for a new and promising technology or product or have a history of being at the forefront of industry developments. This is the primary reason that growth companies do not pay out dividends. The company's goals are best served by reinvesting its earnings into product research and development, thereby fueling expansion.

Growth vs. Value

The distinction between growth and value stocks is very important in investing. While growth stocks are those that are anticipated to generate substantial capital gains, value stocks are those that the market sees as underrated or ignored. Growth stocks are often overvalued because the market sees them as money-makers. Value stocks, by definition, are undervalued.

While value stocks may be underpriced due to disappointing earnings reports, negative media attention, or legal troubles, they still have good financials and a solid dividend payout history. A consistent dividend track record is crucial to a value stock as it is this reliable investment income that tells investors the stock is worth buying. Value stocks are rarely glamorous and are often older companies that, while they won't be going anywhere soon, aren't exactly on the cutting edge of industry innovation.

Typically, prudent investors hold a combination of growth and value stocks to capitalize on the benefits of both investment types.

RELATED TERMS
  1. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  2. Growth Investing

    A strategy whereby an investor seeks out stocks with what they ...
  3. Growth Company

    Any firm whose business generates significant positive cash flows ...
  4. Growth Fund

    A diversified portfolio of stocks that has capital appreciation ...
  5. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
  6. Capital Growth

    The increase in value of an asset or investment over time. It ...
Related Articles
  1. Managing Wealth

    Value or Growth Stocks: Which is Best?

    The answer to the age-old growth versus value debate depends on a number of factors. Here's what to consider.
  2. Investing

    Growth Investing

    Growth investing is a strategy where an investor seeks out companies demonstrating signs of high earnings that are well above the average rate compared to other firms in their industry and within ...
  3. Markets

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
  4. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  5. ETFs & Mutual Funds

    How to Invest Your Excess Cash in Growth Stocks

    Understand the choices that must be made when using excess cash to invest in growth stocks, including different investment vehicles.
  6. Investing

    Growth Investing: 3 Tips to Consider

    Learn the basics of growth investing, and discover three tips for avoiding the risk of losing money while employing a growth investment strategy.
  7. Investing

    Why Do Some Companies Pay A Dividend, While Other Companies Do Not?

    Rapidly growing companies usually don’t pay dividends. Instead, they reinvest earnings to fund growth and increase their value.
  8. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Stocks

    What they are: Securities that represent ownership in the corporation that issued the stock. Stocks are also called equities. Pros: Capital appreciation; often outperform other investments; ...
  9. Markets

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  10. Investing

    Investing in Growth Vs. Value in 2016

    Examine the arguments and implications for a value-investing strategy versus a growth-investing strategy as the stock market enters 2016.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. How should I balance my portofolio between dividend paying stocks and growth stocks?

    Are there any rules of thumb for balancing ones portfolio between dividend stocks and growth stocks? How should I think about ... Read Answer >>
  3. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ... Read Answer >>
  4. What is the incentive to buy a stock without dividends?

    While dividends are the only direct income (money paid out), the total return of holding, a stock is the dividend plus the ... Read Answer >>
  5. Are telecommunication stocks bought for income or growth?

    Dig deeper into the complicated nature of the telecommunication market and see why telecom stocks sometimes act like both ... Read Answer >>
  6. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center