What is a Performance Stock?

Geri Terzo

Investing in the stock market carries with it a set of risks and rewards. Investing in a performance stock is no exception, because much of the strategy behind selecting these types of securities is based on the expectation for future rewards. A performance stock, more commonly known as a growth stock, is one that is expected to generate earnings at a rate higher than its industry peers. Additionally, this investment shows signs of generating returns that are more attractive then those in the broader financial markets.

A performance stock is often referred to as a growth stock.
A performance stock is often referred to as a growth stock.

Stocks trade in the financial markets for a price per share based on supply and demand in that security. The price rises and the stock becomes more expensive as demand rises, and consequently the value declines as interest in that stock falls. A performance stock tends to be one that trades as an expensive investment relative to proven earnings or profitability, which is an indication that investors have confidence in future price appreciation. It also is an investment that might exhibit severe price fluctuations.

The benefits of investing in a growth stock might not be traditional because the strategy is based on expectation. In order to live up to that reputation, a company that is considered a growth stock might hold back in other areas. For instance, one benefit of investing in the stock market is to receive dividend payments. These are rewards that company's make to investors via cash and stock distributions that are made quarterly or yearly and that depend on the level of profits generated. A performance stock, however, is more likely to use any profitability as a reinvestment into that company's growth plans rather than pay a dividend.

The reward for performance stock investors generally is tied to the fact that a company's profitability will increase faster than that of other companies, which theoretically leads to a higher stock price. As a result, investors subsequently can sell shares of an increasing stock for a profit. There are risks too, however. Investors are betting on a company that is expected to generate future earnings or profits, so if a company disappoints and does not deliver on those expectations, the stock price usually will suffer. Much of the reason for investing in a growth company is tied to future earnings performance, so a stock can be more severely punished by investors for missing the mark than other stocks might be.

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