A growth stock is a share in a company that is expected to grow faster than the overall market. These companies usually reinvest most of their profits back into the business to expand operations, develop new products, or enter new markets. Instead of paying high dividends, they focus on increasing revenue and earnings over time. 

Growth stocks are valued primarily on their future potential rather than their current profits.

Investors are willing to pay a higher price for growth stocks because they expect strong earnings expansion in the coming years. This often results in higher valuation ratios compared to more established companies. Growth companies are typically active in innovative sectors such as technology, healthcare, or renewable energy. However, because expectations are high, growth stocks can be more volatile. If a company fails to meet projected earnings targets or if economic conditions change, the share price can decline sharply. Growth investing therefore involves balancing the opportunity of above average returns with the risk of higher price fluctuations.

Short example:

• Suppose a technology company earns $1 per share this year and reinvests all profits into research and expansion instead of paying dividends.

• Investors believe earnings will grow to $2 per share within three years due to strong product demand and market expansion.

• They buy the stock at a high price today based on those expectations. If the company successfully doubles its earnings, the share price may increase significantly as profits rise. However, if competition intensifies and earnings only reach $1.20 per share, investors may reassess the company’s prospects and the stock price could fall sharply. 

   

Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.