What Is A Growth Stock?

A number of fledgling stock market investors are curious to know what is a growth stock and how exactly such a stock can benefit their portfolio

. A growth stock is a stock that enjoys a positive overall cash flow over time. When you invest in growth stocks, you invest in a company with steadily increasing revenue and earnings. Although growth stocks are identified by their significantly higher rates of increases in both revenues and income, most analysts regard growth stocks as those with a return on equity of 15 percent or greater.

Even with a high ROE, a significant portion of a company's earnings will be allocated to business activities to produce the end result of a much higher ROE. As a result, the company pays minimal or no cash dividends to its stockholders. Increased funding translates into more efficient operations, greater expansion of facilities, better products and services, and ultimately substantial revenue and income growth. Considering these indications, it can be said that investing in technology companies is investing in growth stocks since they are always improving their products and services to constantly keep up with the changing times and their customers' evolving preferences.

When one learns more on what is a growth stock, one must also realize that this is not necessarily the same as the stock of a growth company. Although a growth company has tremendous potential to expand over time, that feature alone does not result in a bona fide growth stock. Increased spending for maintaining the company's expansion could even land it in debt especially if earnings continue to fall short of investor expectations. The stock of a growth company may be considered a growth stock only if increased spending translates into revenue and income targets being achieved within a reasonable time.

Growth stocks are vital to the satisfactory performance of your portfolio, but having your portfolio composed entirely of growth stocks is not a wise investment strategy. Growth stocks foster sustainability over time due to regular increases in stock value, but regular movement can also go in the opposite direction and the drops can be as frequent. It is advisable to have a mix of growth stocks and value stocks--whose value will remain unchanged during periods of market volatility--in your portfolio so that you will enjoy a balance between cash flow and stability. You will want the worth of your assets to increase as opposed to remaining stagnant day after day, but you will also a firm foundation to fall back on in case the potential for growth has been temporarily negated.

Lastly, in answering the question of what is a growth stock, it is a means of countering the effects of inflation. Goods and services in general become less affordable every year, and even wage increases might not be enough. A portfolio partially consisting of growth stocks can help protect your spending power from the effects of inflation by providing you with steady cash flow to augment your existing salary if you're still working or your pension if you're already retired.

by: William WL Tan

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