Loading the player...

What is a 'Growth Stock'

A growth stock is a share in a company that is anticipated to grow at a rate significantly above the average for the market. These stocks generally do not pay dividends, as the companies usually want to reinvest any earnings in order to accelerate growth in the short term. Investors then earn money through capital gains when they eventually sell their shares.

Investment in growth stocks can be risky. Because of the lack of 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.

Today, growth stocks compose a range of technology, biotech and some consumer discretionary companies.

BREAKING DOWN 'Growth Stock'

Growth stocks tend to share a few common traits. For example, growth companies tend to have unique product lines. They may hold patents or 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 innovation, they often have a very loyal customer base or a significant amount of market share in their industry. For example, an app development company that is the first to provide a new service may be a growth stock, because it gains market share by 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 may become a growth stock.

Many small cap stocks are considered growth stocks. However, some larger companies also issue growth stocks.

Growth Stocks vs. Value Stocks

Growth stocks differ from value stocks. Investors expect growth stocks to earn substantial capital gains. This expectations can result in these stocks being overvalued. Value stocks on the other hand, often are underrated or ignored by the market. They may eventually gain value, but investors also attempt to profit from the dividends they typically pay.

Many investors try to include both growth and value stocks in their  for diversification.

Some value stocks are underpriced due to poor earnings reports or negative media attention. However, they often still have strong dividend payout histories. A value stock with a strong dividend track record can provide reliable income to an investor. Many value stocks are older companies that can be counted on to stay in business, even if they aren’t particularly innovative or poised to grow.

RELATED TERMS
  1. Value Stock

    A value stock is a stock that tends to trade at a lower price ...
  2. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  3. Income Stock

    An income stock is an equity security that pays regular, often ...
  4. Stock Dividend

    A stock dividend, also known as a scrip dividend, is a dividend ...
  5. Dividend Growth Rate

    The dividend growth rate is the annualized percentage rate of ...
  6. Tax Differential View Of Dividend ...

    The preference of some investors for equity appreciation over ...
Related Articles
  1. Investing

    Income, Value, and Growth Stocks

    Investors who buy stocks generally seek one of three criteria: undervalued holdings (value stocks), growth potential (growth stocks) or steady income (income stocks).
  2. Investing

    5 Characteristics of Good Growth Stocks

    Growth stocks can give investors good returns but not all growth stocks are the same. From leadership to growth, there are traits investors can look for that help them find the best growth stocks.
  3. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    Learn about three dividend stock misconceptions and how to avoid them for greater gains.
  4. Investing

    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.
  5. Financial Advisor

    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.
  6. Investing

    How Dividend Reinvestment Grows Your Money Faster

    Dividend reinvestment is a smart strategy for growing your investments faster over the long term, but it’s not a get-rich-quick proposition.
  7. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
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. The incentive to buy a stock without dividends

    While dividends are the only direct income for shareholders, stocks that do not pay dividends prefer to create value in other ... Read Answer >>
Trading Center