Takeaways
- Growth stocks are expected to grow revenue and sales higher than the market.
- Growth stocks can have high price-to-earnings ratios as investors pay for growth.
- Growth stocks reinvest their profits into growth strategies, not dividends.
- Investors believe growth stocks have above-market growth potential.
- Investors can choose to invest in various stocks to meet their portfolio strategies, including growth, value, and income.
What Is a Growth Stock?
A growth stock is an ownership share in any company that is expected to grow significantly above the average growth rate of the overall market. These companies typically reinvest their earnings into the business instead of paying dividends to shareholders. Investors purchase growth stocks with the expectation that the stock price will increase over time, offering substantial returns through capital appreciation.[1]
Growth stocks are often found in dynamic sectors such as technology, healthcare, or consumer services—industries where innovation and disruption drive performance. These companies may not yet be profitable, but they show strong revenue growth, expanding customer bases, and scalable business models that indicate they are positioned to capture high future earnings.
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How Growth Stocks Work
Growth stocks operate on the principle of forward-looking value. Investors in growth stocks focus less on current profits and more on a company's future potential. These businesses are often in their early or middle stages and use their revenue to fund expansion, research and development, or new product launches.
Because of their high-growth potential, these stocks trade at a high price-to-earnings (P/E) ratio. This means that investors are willing to pay more for every dollar of earnings because they anticipate it will grow significantly. Investors expect to earn outsized capital gains from these investments, adopting the traditional buy low and sell high mantra. However, this also comes with higher risk, as these companies are more vulnerable to market volatility and economic downturns.
Smart Tip:
To calculate a stock’s P/E ratio, divide its current trading price by its Earnings Per Share (EPS). You can find a publicly traded stock’s trading price on the Nasdaq or NYSE.
Growth stocks have a particular phenotype. These businesses have a uniqueness that gives them an edge over the competition. They often hold patents on technologies, which allows them to outperform their competition substantially (e.g., algorithm patents). Other times, they have particularly innovative or appealing product lines (e.g., iPhone).
The competition among growth stocks is fierce. However, investors reward companies that can maintain a leg up on the competition with sky-high valuations. These high valuations allow companies to raise money quickly, catalyzing the innovation and growth cycle even faster.
Many small and medium market capitalization companies are considered growth stocks because they offer the chance of high returns. Larger market-cap companies are generally viewed as having more mature and stable businesses.
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Examples of a Growth Stock
One widely recognized example of a growth stock is Amazon. When Amazon launched its initial public offering (IPO) in 1997, its common stock cost $18 per share, or $0.075 adjusted for the later stock splits, and the company was massively unprofitable.[2] However, investors supported Amazon because they believed in its long-term business strategy and potential.
Over time, the company became profitable and emerged as a dominant force in e-commerce and cloud computing. The e-commerce giant even saw growth during economic recessions, including the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic recessions.
Other modern examples of growth stocks include companies like Apple (APPL), Nvidia (NVDA), and Shopify (SHOP)—businesses that demonstrate strong growth trajectories even if their valuations seem high by traditional metrics.
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Who Invests in Growth Stocks?
Growth stocks attract many investors, from individuals to large institutional portfolio managers. Each investor type may have unique motivations for investing in growth stocks. Here’s who can focus on growth stock investing:
- Retail Investors: These are individual investors who buy and sell stocks through brokerage accounts. Many retail investors chase growth stocks for the potential of high returns, primarily when investing in long-term-oriented portfolios like retirement savings. Read more about retail investors.
- Accredited Investors: Accredited investors typically have higher net worth and access to more complex investment opportunities. They include growth stocks in their portfolios to balance risk and return allocation. They may also invest in pre-IPO companies or private equity opportunities in high-growth sectors. Read more about accredited investors.
- Institutional Investors: These include massive mutual fund complexes, insurance companies, and investment firms. Institutional investors often invest heavily in growth stocks, using proprietary research and analytical tools to search and evaluate companies with high upside potential. Read more about institutional investors.
- Institutional Investors: These include massive mutual fund complexes, insurance companies, and investment firms. Institutional investors often invest heavily in growth stocks, using proprietary research and analytical tools to search and evaluate companies with high upside potential. Read more about institutional investors.
- Hedge Funds: Hedge funds actively manage portfolios using various strategies. Some funds focus exclusively on growth investing and target companies with disruptive business models, emerging technologies, or rapid market expansion. Read more about hedge funds.
- Pension Funds: While pension funds traditionally invest in more conservative assets, many include growth stocks as part of a diversified portfolio to increase overall returns. These long-term investors can ride out short-term volatility in pursuit of higher long-term gains. Read more about pension funds.
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Growth vs. Value Stocks
Growth and value stocks represent two fundamental investing styles. Growth stocks focus on future potential, while value stocks emphasize current undervaluation.
- Growth Stocks—Investors believe that growth stocks are poised to capture new customers, gain market share, and experience massive growth, which they think will cause massive stock price appreciation. As a result, these stocks have high price-to-earnings ratios, preserve cash and pay little or no dividends, focus on driving revenue growth, and are often found in innovative or emerging industries.
- Value Stocks—Investors view value stocks as underappreciated by the market. They believe a fundamental mismatch exists between a company's intrinsic value and its current trading price. This misalignment could be due to a series of poor quarterly reports, insufficient or bad media coverage, or unanticipated short-term competitive hurdles. Because of these issues, value stocks trade at low price-to-earnings ratios and often pay dividends to reward shareholders. You can find value stocks in any stock market sector.
Each style has its strengths and weaknesses. Growth stocks may outperform in bull markets when investors are optimistic, while value stocks tend to hold up better during downturns due to their lower volatility and dividend payments. Many investors diversify by owning both growth and value stocks in their portfolios.
Are Growth Stocks a Smart Investment?
Growth stocks can be a fantastic investment, especially if you have a long-term investment time horizon and a high risk tolerance. These stocks have the potential to deliver exceptional returns, but they also crater in value if their anticipated growth fails to materialize.
Here are a few points to consider:
| Pros | Cons |
|---|---|
| High return potential | Price volatility |
| Exposure to innovation and market leaders |
No dividend income |
| Great for long-term wealth-building |
High valuations can increase downside risk |
Smart Summary
A growth stock is an ownership stake in a company expected to increase its earnings and revenue at a growth rate well above the market average. These companies preserve their profits and cash for reinvestment to fuel future expansion and tend not to pay dividends. Whether you are an individual investor looking to increase your net worth or a fund manager looking to inject alpha into your portfolio, growth stocks can play a decisive role in achieving your financial goals.
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(1) Corporate Finance Intuitive. Growth stocks. Last Accessed April 15, 2025.
(2) Amazon. Investor Relations – FAQs. Last Accessed April 15, 2025.
