What Are Growth Stocks?

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What Are Growth Stocks?

A growth stock is issued by a corporation that has reported higher than average earnings growth and which expects to continue to demonstrate growth in profits. Its sales are increasing, and its expenses are in line. As a result, profits continue to grow. This company is likely to have a strong positive cash flow and to reinvest a large amount of its increasing earnings into new products, new markets, and other efforts that lead to even more growth.

Things To Know

  • Growth stocks are the stocks of companies with higher-than-average growth.
  • With growth stocks, you can share in a company’s growth, but will also share its risk.
  • Growth stocks come in forms to suit every investor.

Growth stocks carry much risk and potential reward

These stocks enable you to invest and participate in the growth of the company. They offer the potential of large increases in value on the secondary market and the opportunity to realize significant earnings compared to stocks on average. Of course, they also carry more risk than stocks issued by utilities, banks, and other, more stable companies. This is because the valuations are often based on anticipated earnings that can prove to be less than expected.

Growth stocks take many forms

Growth stocks come in forms to suit every investor. You can find growth stocks issued by well-known, blue chip corporations with long histories of earnings growth, and by less-established companies in dynamic industries. Further, growth stocks are issued by companies of all sizes. Growth stocks may come in the form of small-cap stocks with market capitalizations under $1 billion, mid-cap stocks with market capitalizations between $1 billion and $5 billion, and large-cap stocks with market capitalizations above $5 billion. (Market capitalization is the stock price times the number of outstanding shares. For example, if the stock price is $20 and the number of outstanding shares is 1 million, the market capitalization is $20 million.)

Investors should review a company’s annual reports and study its statistics to evaluate its growth potential. You can obtain more information about growth stocks using a myriad of information sources online or in print.