Growth stocks
Published:Wednesday | June 8, 2011 | 12:00 AM
A growth stock is the stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.
A growth company typically has some sort of competitive advantage - a new product, breakthrough patent, overseas expansion - that allows it to fend off competitors.
Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects to finance the expected growth. The investor is, therefore, betting heavily on price appreciation or capital gains.
Growth stocks are often 'glamour stocks' and their price tends to be quite high relative to their current earnings (high PE ratios). Examples of growth stocks would be Google, Apple and many technology-type stocks.
risk factor
Investors should note that, while growth stocks often generate above-average returns, they are typically not cheap and there is a real risk that the expected growth will not be realised.
Investing your hard-earned money in growth stocks can lead to excellent returns if you make the right stock choices. For example, Google would have earned up to 700 per cent if you invested at the start.
Growth investing is riskier than investing in well-established companies that have been paying dividends for years. It all comes down to your risk-tolerance level. If you are a younger investor, who can afford to lose money, then you may be better suited than an older investor who is investing for retirement.