What are Growth Stocks - Features & Benefits

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Growth stocks offer investors the chance to take advantage of a company’s potential growth and expansion to make profits by investing in that company’s stock. Typically, companies that wish to reinvest their profits to expand or evolve further offer lucrative investment opportunities to investors.

While there are a plethora of companies from several sectors and diverse industries to invest in, there are some companies that investors view with an eye on investment as they expect these to grow at a rapid rate. Growth stocks are the stocks of a company that reinvest any earnings it makes back into the company as it has the objective of further expansion and growth. Such companies view themselves as having optimal growth prospects in their industry or market. These companies seek rapid growth in the short term but may take longer periods in their growth trajectories. It is worth knowing the features and benefits of growth stocks so that investors can make educated decisions about their investments. 

Article Highlights 

  • Understanding Growth Stocks
  • Growth Stocks - An Example
  • Features and Benefits of Growth Stocks

Understanding Growth Stocks

You may have heard about growth stocks, and although the names of these stocks are quite telling, investors need to be clear about their true meaning. As different types of stock trading are aligned with different types of stock, knowing about growth stocks lets investors decide if these are the appropriate investment options.

Essentially, growth stocks comprise company shares that may be predicted to grow in value (due to estimated company growth) at a rate that is above the average stock market value at any point in time. Companies may be freshly listed and portray substantial growth trajectories as known by historical data. These companies may also be looking to expand their operations as they believe they are on the path to getting bigger. Consequently, such companies raise wealth by reinvesting their profits into the company to make further substantial returns. 

Rather than distributing their profits as dividends to shareholders, such companies reinvest their profits into activities like innovation and invention, R&D, and other operations to make their businesses stronger for future evolution. Investors view high-growth stocks as those having the potential to grow significantly in the future, and these investments could be seen as long-term investments, depending on the company’s operations and the industry/sector. The main aim of investing in growth stocks is to make gains from capital appreciation due to the company’s surge in value in the future. 

Growth Stocks - An Example

A growth stock need not necessarily arise out of a company in the initial stages of growth. High-growth stocks may come from companies that are already household names and are expected to grow further, so that the value of the stock, currently high, may grow even further in value in the future. 

Companies that have very high P/E ratios and are expected to grow more look appealing to investors wanting to invest in growth stocks. This is due to the fact that years down the road, the present stock value may appear low in hindsight. For instance, a huge pharmaceutical company may be working on a breakthrough HIV treatment. Such a company reinvests its profits to further research this developing drug and holds trials for the same. Stock from this kind of company may be viewed as a growth stock. 

The Features & Benefits of Growth Stocks

Investors will discover that the potentially best growth stocks in the market have certain characteristics that translate into benefits. These are explained below:

  • Potential for High Returns with P/E Ratios High

Growth stocks are those that are expected to grow at a substantial rate at some point in the future. These stocks typically have heightened P/E ratios or price-to-earnings ratios, and this implies high investment returns. The benefit for investors is clear, these companies have a potential for high returns in the future. 

  • No Dividends Issued

One of the clear features of a growth stock is that there are no dividends you get from companies issuing such a stock. High-growth stocks are issued by companies that do not distribute their profits in dividend form, rather they reinvest in the company to aim at future growth. The benefit that investors get from this is that they remain invested in companies that plan their strategies for innovation and development optimally and can have potentially high growth in the future due to this reinvestment. 

  • Investor Confidence

Growth stocks with high P/E ratios indicate that investor sentiment towards them is positive and that investors have confidence in these stocks. Consequently, new investors are willing to take a chance on investing in these stocks as they believe in market sentiment. 

Know Your Growth Stocks Well

For investors who have their eye on future gains and capital appreciation, growth stocks are potentially worth considering. Nonetheless, it is important to note that growth stocks are distinct from value stocks, and the two kinds of stocks get confused by investors at times. Value stocks are currently undervalued but have strong fundamentals for future growth. Growth stocks may have a high value but show further growth potential as the company is viewed as making efforts to meet expansion goals. Whatever stocks investors choose for their investment, these must be aligned with the unique goals of different investors and their financial plans for the future.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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