What is a growth stock?

Cliff’s notes:

  • Has higher price-to-earnings ratio than the broader market

  • Has a record for high earnings growth

  • Tends to be more volatile than broader market

  • Is often considered a riskier investment

  • Generally doesn't pay dividends to shareholders

You will often hear people describe a particular security as a GROWTH STOCK. What is it? A growth stock typically refers to a business that's shown above-average earnings and has the potential to grow faster than the overall economy. These stocks generally increase in price more quickly than other stocks. As a result you may pay more for each share as a multiple of the company's earnings (P/E) than you would for the stock of a slower-growing company. Growth stocks are usually more volatile, and perceived to be a riskier investment.

Growth stocks react faster to market swings, bringing a lot of volatility into a portfolio. Therefore, it's a good idea to always consider your investment time horizon (how long you can leave the money invested) as well as your immediate cash needs. There is a related set of stocks often called “emerging growth stocks” - these include companies that have the potential to achieve high earnings growth but don’t yet have a long history to support that expectation.