A stock that is issued by a company whose growth rate is appreciably higher than the market average. More specifically, the company’s income is growing at a faster rate than other companies in the same sector or the broader market. Rather than paying dividends to shareholders, growth companies typically use their earnings to finance expansion or product development. A growth company is not negatively influenced during periods of slow economic activities because it is less linked to the economic cycle. A growth stock is usually characterized by (1) high demand on its company’s product or service, (2) stable or improving profitability trend, and (3) sufficient profits that can be ploughed back for future growth.
Typically, a good growth stock generates a high return on equity (ROE).
Growth stocks are also known as hot stocks.
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