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What are Growth Stocks?

Ken Black
Ken Black

Growth stocks are those expected to grow in value at a rate higher than what the average market is doing. Many times, growth stocks may not come with a dividend payment simply because the entire focus of the stock is in growing its net worth. While they can be a very important part of an investor's portfolio, there are also some things to keep in mind about growth stocks.

First, the decision to invest in a growth stock or a growth stock fund should not be taken lightly. As with any type of investment, it is possible that the return on investment will not be positive with a growth stock. In reality, investment in these types of stocks is going to be riskier than investment in other products. While it may make sense, given the individual investor's goals, in others it may not make much sense at all.

Growth stocks may increase in value at a substantial rate.
Growth stocks may increase in value at a substantial rate.

Those who are investing in a growth stock should look at two different approaches. The first involves a long-term financial investment package that will look toward the future, slowly moving stocks from higher risk to lower risk as the time of retirement nears. The other technique is to pick a point at which the investor feels there has been an adequate return on investment and then sell. This helps protect the gains made, in the case the stock is overvalued and experiences a correction.

For those who depend on stocks for dividend payments, or who like to see dividend payments, growth stocks will likely not be a good option. While some may pay dividends, many do not. This is because the value of the dividend payment, per share, is subtracted from the price of the stock. Therefore, one way to grow a stock quicker is to cease dividend payments and reinvest in the company.

While there is not a specific label on any stock that clearly distinguishes one as a growth stock, there are ways of finding this out. Many online sources review what they consider to be the hottest growth stocks. In addition, a financial adviser should have information on these types of stocks and recommend a good strategy.

Growth stocks tend to do well when the economy is in a good shape, though it is always important to look for trends, no matter what the overall trend of the economy. For example, even in down times, certain sectors of the economy may do better, or at least tend to remain more stable. For example, these include drug manufacturers and energy companies, to a certain extent. Understanding the business climate for the industry in which you plan to invest is a critical key to success.

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    • Growth stocks may increase in value at a substantial rate.
      By: Scanrail
      Growth stocks may increase in value at a substantial rate.