Growth Stock
IntermediateA growth stock is a share in a company expected to grow its sales and earnings faster than the overall market, often valued at a high price relative to its current profits.
Growth companies typically reinvest most of their profits into expansion, research and new products, rather than paying dividends. Investors buy them expecting that rapid future growth will lead to rising share prices.
Growth stocks are often found in technology, healthcare and other innovative sectors, although any company with strong expansion prospects can be one. They usually have high price-to-earnings and price-to-sales ratios, because investors are paying for expected future profits rather than current ones.
For example, a company growing revenue at 30% a year might trade at 50 times its earnings, while a mature company growing at 3% might trade at 12 times earnings.
Growth stocks can deliver large returns if the company meets or exceeds expectations. But they can be volatile and especially sensitive to changes in interest rates, because much of their value depends on profits expected far in the future. If growth slows or expectations fall, their share prices can drop sharply.
Growth stocks are often contrasted with value stocks, which trade at lower prices relative to their current earnings or assets.
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