Growth Stocks

Growth stocks are those issued by companies that have recently shown a growth rate well above the industry average and are expected to keep up the momentum. These companies are usually not established. Instead, they're smaller, newer companies with great potential to appreciate rapidly. Growth stocks are characterized by:

• Higher volatility risk. There is no guarantee that the growth rate will keep climbing. If the company does not grow as fast as expected, its stock price will fall, even if the earnings are stable. Moreover, growth stocks are more vulnerable to negative news. The stock price usually plunges hard when negative news appears.
• High P/E. Growth stocks are considered overvalued, which means investors are paying more than the company's current worth.
• Little or no dividends. Instead of paying dividends, the issuing companies tend to reinvest the earnings for better growth.

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Next step: Learn how to choose stocks by using Screeners.

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