Growth Stock
A share of a company expected to grow revenue and earnings materially faster than the market, and priced accordingly.
How it is identified
Test: expected earnings growth well above the market average, usually with a high P/E and low or nil dividend payout
Unit
qualitative
In depth
A growth stock's value sits mostly in cash flows expected several years out, which makes it arithmetically more sensitive to interest rates and to any disappointment in the growth rate. Companies at this stage generally reinvest rather than pay dividends, so total return depends almost entirely on price appreciation. The key confusion is between a growing company and a growth investment: if the expected growth is already in the price, delivering it produces an ordinary return, and missing it produces a large loss. Growth and value are opposing labels only in style-box language; a fast-growing company bought below its worth is both.
Worked example
A company growing earnings 25% a year trades at 60 times earnings, while the market trades at 22 times. If growth slows to 12%, a rerating to even 30 times halves the share price, despite earnings still rising. The price was carrying the growth assumption, not the earnings.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Growth Stock” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.