A growth stock refers to a publicly traded company whose earnings and revenues are expected to increase at an above-average rate compared to the overall market. Growth stocks typically reinvest their earnings back into the company to fuel expansion, rather than distributing dividends to shareholders.
Growth stocks often operate in sectors or industries experiencing rapid expansion or have disruptive business models that drive substantial growth such as tech and healthcare. Investors are drawn to growth stocks based on their belief that the company's earnings and revenues will continue to increase at an accelerated pace. The market often assigns higher valuations to growth stocks as a reflection of their anticipated future growth potential.
Because the focus is on driving long-term growth and maximizing shareholder value through capital appreciation, growth stocks typically do not pay dividends or pay minimal dividends. However, successful investments in growth stocks can deliver significant rewards, as the companies continue to expand, increase market share, and generate strong returns. Well-chosen growth stocks have the potential to outperform the broader market and provide attractive returns for investors.
Growth stocks can be subject to higher levels of volatility and risk compared to more established, dividend-paying companies. Since their valuations are often based on future expectations, any negative news or failure to meet growth expectations can lead to significant price fluctuations.