Growth Stock: What It Is, Examples, vs. Value Stock

Growth Stock: What It Is, Examples, vs. Value Stock

What is a growth stock?

A growth stock is a share in a company expected to increase sales and earnings faster than the market average. These companies typically reinvest profits to fund expansion rather than pay dividends, so investors seek returns mainly through capital appreciation.

Key takeaways

• Growth stocks aim for above‑average revenue and earnings expansion.
• They often trade at high price‑to‑earnings (P/E) ratios because valuations reflect anticipated future growth.
• Most growth stocks pay little or no dividend.
• High expectations make them more volatile: if growth disappoints, prices can fall sharply.
• Growth and value stocks represent different investing approaches and can be combined for diversification.

Typical characteristics of growth stocks

• Strong revenue or earnings growth (actual or projected).
• High P/E and often high price‑to‑sales ratios.
• Little or no dividend payouts; earnings are reinvested.
• Competitive advantages such as patents, unique products, or network effects.
• Large addressable market and a strategy focused on scaling share and innovation.
• Frequently found in fast‑growing sectors (technology, biotech, e‑commerce) and across market caps—from small caps to large, fast‑growing firms.

How growth stocks differ from value stocks

• Growth: bought for expected future capital gains driven by accelerating sales/earnings; typically high valuations and low dividends.
• Value: bought because they appear undervalued relative to fundamentals; often lower P/E and higher dividend yields; tend to be established businesses with stable cash flows.
  Investors often blend both styles to balance growth potential and income/stability.

Risks of growth investing

• Valuation risk: high prices embed optimistic assumptions—if growth falters, stock prices can drop sharply.
• Earnings uncertainty: some growth companies have low or negative current earnings.
• Higher volatility: prices can swing widely with news, execution, or macro changes.
• Concentration risk: many growth opportunities cluster in a few sectors, increasing sector exposure.

How to identify a growth stock

Look for:
* Above‑average historical or forecasted revenue and earnings growth.
* High P/E relative to peers, justified by growth expectations.
* Low or nonexistent dividend yield.
* Signs of competitive advantage (patents, unique tech, dominant user base).
* Large and expanding addressable market.
Use a combination of quantitative screens and qualitative research on business models and competitive position.

Examples

• Amazon (AMZN): Historically classified as a growth stock—large market share in e‑commerce and cloud services with a history of reinvesting profits. High P/E ratios reflected investor expectation of continuing expansion.
• Hypothetical biotech startup: A company with a promising drug in early clinical trials can be a growth stock—if trials succeed and approvals follow, the upside is large; if not, the investment may lose value.

Investment considerations

• Time horizon: Growth investing typically suits longer horizons to allow expectations to be realized.
• Diversification: Combining growth and value can reduce volatility and provide income balance.
• Risk tolerance: Be prepared for larger drawdowns and use position sizing and stop limits as appropriate.
• Valuation discipline: Assess whether projected growth justifies the current price rather than buying solely on hype.

Bottom line

Growth stocks offer potential for significant capital gains when companies scale revenue and profits rapidly, but they carry above‑average risk because valuations often price in high future performance. Understanding the company’s growth drivers, competitive advantages, and how its valuation compares to projected growth is essential before investing.