What are growth stocks?
Growth stocks are shares of companies that are expected to experience significant growth in their earnings and stock prices over time. These companies typically operate in industries with high growth potential, such as technology, healthcare, or renewable energy. Investors are attracted to growth stocks because they offer the possibility of substantial returns on their investments.
Key takeaways
- Growth stocks offer the potential for significant long-term capital appreciation as they belong to companies expected to grow at an above-average rate.
- Investing in growth stocks requires careful analysis of the company's business model, competitive advantage, and market potential.
- While growth stocks can be more volatile than established companies, they present an opportunity for investors seeking higher returns in exchange for taking on additional risk.
How do growth stocks work?
When you invest in growth stocks, you are essentially buying a share of a company that is anticipated to expand and increase its profits at an above-average rate compared to other companies in the market. Growth stocks often reinvest their earnings back into the company to fuel further growth, rather than paying out dividends to shareholders.
Growth stocks in the real world
A popular example of a growth stock is Amazon. Over the years, Amazon has experienced rapid growth by disrupting the retail industry and expanding into various sectors such as cloud computing and streaming services. As a result, its stock price has surged, rewarding early investors who recognized its growth potential and held onto their shares.