In financial parlance, growth stocks are a company stock which generate sustainable and significant positive cash returns, and whose earnings and revenues are predicted to expand more rapidly than an average firm in the same industry. Typically, growth companies have some kind of competitive advantage (a breakthrough patent, a new product, or perhaps some overseas expansion) which enable them to fight off their competition. Usually, growth stocks pay lower dividends, as the firm will reinvest retained profits into capital projects. This allows the firm to obtain above average rates of growth with regards to earnings and revenues. Inevitably, this assists with the progress of the firm.
For general investment managers, the assessment of stock is based on its’ rate of growth, rather than its’ price. However, rigid growth investors will happily pay premium prices if they happen to notice any types of stocks that have momentum. Invariably, studies into market investing show that growth stocks always perform better whenever the demographic cycle, or economy, is functioning on a high mode.
Furthermore, these types of stocks are sold at higher profit earning ratios. In a prosperous economic environment, the respective firms find it easier to successfully negotiate their development. When buying the stock of a company, the investor is really betting on the future expansion of that company. Often, it is discovered that these growing companies actually surpass their profit estimates, which is good news for those who invest. The investors determine the holding period that directly depends on the continued expansion of the firm.
The way that growth stocks move in the stock market offers a good indication with regards to their future as well. It is common for growth stocks to increase in value. However, what can happen is that, because of unforeseen company or market circumstances, the growth will slow down significantly, or even stagnate. Investors should never forget that financial markets will not be kind to any growth stocks that do not retain their momentum. This type of sign in the market should serve as an ample warning to the investor to sell his stock off and avoid huge losses.