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Growth stock definition
A growth stock is a share in a company expected to grow its revenue and earnings faster than the market average. Investors buy it for the rise in share price that rapid expansion can bring, rather than for income.
Such companies tend to reinvest their profits into expansion rather than pay them out, so they pay little or no dividend. The market prices in the high expected growth, which usually gives a growth stock a high P/E ratio and a price that can swing hard when results or forecasts shift. The return depends on that growth actually arriving.
A growth stock sits opposite a value stock. A growth stock trades at a rich valuation on the promise of future expansion, while a value stock trades cheaply relative to its current earnings or assets and more often pays a dividend. The two describe different bets: paying up for future growth, versus buying present worth at a discount.
Growth stock Example
You compare two shares. The growth stock earns USD 2 a share and trades at USD 80, a P/E ratio of:
USD 80 √∑ USD 2 = 40
You pay USD 40 for each USD 1 of current earnings, betting that profits climb fast enough to justify it. A value stock on a P/E of 10 would cost far less per unit of today's earnings, but it carries lower growth expectations.
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