What are growth stocks?
Growth stocks are the shares of companies that are expected to grow at a pace that significantly outperforms the average market. Stock traders hope to see capital gains because the growth stocks are expected to rise in value exceptionally quickly.
Growth stocks are often found in the technology industry, holding patents or innovations that capture a large portion of the market – or when a significant amount of market share is still available.
Do growth stocks pay dividends?
While it’s not a strict rule, growth stocks usually don’t pay dividends. Instead, the companies reinvest their profits back into the business, which helps them expand at a quicker rate. Stock traders might hope for dividends in the future, though, once growth has slowed and the company has stabilised. However, this could take years to happen.
Price-to-earnings ratios: are growth stocks overpriced?
While growth stocks can often have high price-to-earnings (P/E) ratios, a deeper look reveals that they’re expected to generate high earnings in the future – or so stock traders hope. So, in reality, the shares can often be bought at a bargain compared to what their future value will be.
It’s important to remember that all stock trading carries an element of risk, and no company’s shares are a sure thing.