Growth Stock
A growth stock is a share of a company expected to increase its revenue and earnings faster than the overall market.
Growth stocks belong to companies that are expanding quickly, often by entering new markets, launching new products or riding a strong industry trend. Investors buy them mainly for the prospect of rising share prices rather than for current income. Many growth companies pay small dividends or none at all, preferring to reinvest profits in the business.
Because investors expect strong future earnings, growth stocks often trade at high valuations, such as a high price-to-earnings or price-to-sales ratio. That means much of the expected success is already reflected in the price. If growth slows or falls short of expectations, the stock can drop sharply.
Growth stocks tend to be more sensitive to changes in interest rates, because more of their value depends on profits far in the future. They are often contrasted with value stocks, and the two styles have taken turns outperforming each other over the years.
Example: a software company growing revenue 30% a year might trade at a P/E of 60, while a mature utility growing 3% might trade at a P/E of 15.