Debt Dictionary

Growth Stock

Investment Dictionary -> Growth Stock

The term growth stock refers to stock owned by a company that has demonstrated high rate growth during past periods. Therefore, investors anticipate similar upward development that will result in high returns on the investments. In other words, growth stock refers to company shares that are expected to grow at a comparatively higher pace relative to the current state of the market. This term is also known under the name ‘glamour stock’.

The return on equity is calculated by dividing the net income by the equity of the company. Companies should have at least fifteen percent return on their equities in order to classify as growth stock. William O’Neil has studied the performance of 500 top market companies aiming to formulate a functional growth stock investment strategy. In his view, the major goal of the investor is to discover the best performing stocks before their price begins to skyrocket. The purchase of stock should occur prior to the company’s stock consolidation period. Moreover, the purchase of stocks belonging to well-established and reputed companies will minimize the chance of incurring losses. The reasoning is that the solid companies usually have a stable annual growth as well as above the average earning per share. However in the typical case, growth stock does not pay off dividends. The reason is that most companies choose to reinvest their surplus earnings into major development projects. Moreover, growth stocks are riskier investments because of the high price to earnings ratios.

Examples of growth stock companies include: the gas and oil corporation Exxon Mobil; the drilling giant Transocean; the oil and natural gas processing and transporting company Enterprise Products Partners; the world’s top supplier of potash Potash of Saskatchewan; the US most prominent online retailer Amazon; the largest game creator of China Shanda Interactive Entertainment; and the smart phone behemoth Research in Motion, among others. It should be noted that most technology and high tech companies are classified as growth stock.

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