Growth stock is stock issued by a corporation that has demonstrated gains in earnings that are beyond what is considered an average amount. While the formulas used to identify a given investment as growth stock vary, many investors consider any stock option that provides a rate of return of over fifteen percent a year for two to five years in succession to fall into this category. There are also some analysts that consider the stock issued by new and relatively aggressive companies to also be growth stock, even if they have yet to establish a track record of unusually high returns.
One of the factors that distinguishes growth stock from other forms of stock is that the investment pays little to no dividends to the investors. Instead, the return generated by the common stock is put back into the business, helping to fuel expansion efforts of the corporation. Over time, the growth stock issued by the company yields what is known as a high return on equity, assuming that the growth trend associated with the stock continues for several years. This in turn provides the company with more earnings that the alternative or opportunity cost of capital, and thus strengthens the financial position of the business.
The main goal of growth stock is to provide long-term capital appreciation for the business. This form of value investing allows the shares to increase in value over the years, which in turn allows investors who wish to buy the shares, hold them until their value increases to a certain level, then sell the shares to earn a return. Assuming that the shares do in fact appreciate at the rate projected by the investor, this helps to offset the fact that very few or even no dividends are issued to shareholders by the company.
As with any investment option, an investor should look closely at any growth stock before making a decision to purchase shares. This involves looking at any available history of the issuing corporation, assessing the potential for that business to capture a larger market share over time, and what type of increase in value can reasonably be expected from the shares acquired, given the degree of volatility associated with the stock. If the investor is able to find evidence that the growth stock is likely to continue appreciating at a significant rate for a number of years before beginning to level off, the investment is likely to be worth the time and effort. Should the investor believe that is not the case, chances are that his or her interests would be better served by looking at other investment opportunities.
