What Is a Growth Stock

A growth stock refers to the shares of a company expected to grow at a rate faster than the overall market average. Such companies usually reinvest their profits to expand operations, innovate, or capture market share rather than paying regular dividends. They are often found in technology, healthcare, and consumer-focused industries, where innovation drives rapid earnings growth.

Growth stocks are recognised by certain traits that set them apart from other equity categories:

• High Revenue Growth: These companies expand faster than the overall market.
  

• Premium Valuations: They often trade at higher P/E multiples, reflecting strong growth expectations.
  

• Profit Reinvestment: Instead of paying dividends, earnings are used to scale operations.
  

• Innovation: Operate in sectors like technology, healthcare, or e-commerce with disruptive potential.
  

• Volatility: Share prices can swing sharply due to high investor expectations.
  

Example: If a growth stock earns ₹20 per share today and reinvests to grow earnings by 25% annually, its earnings could rise to over ₹48 per share in five years.

Growth stocks can be observed across global markets:

Examples: Companies like Apple, Amazon, and Tesla are seen as growth leaders due to their consistent innovation and market expansion.

Illustration: A stock trading at ₹500 with consistent 20% annual growth could potentially rise to about ₹1,240 in five years, provided the trend holds.

Investors are often drawn to growth stocks for their unique advantages:

• High Capital Appreciation Potential: Strong earnings growth can drive substantial price increases.
  

• Exposure to Emerging Sectors: Access to industries leading technological and economic change.
  

• Wealth Compounding: Reinvested profits fuel long-term growth momentum.
  

• Market Outperformance: These stocks can outperform value stocks in bullish or expanding economies.
  

Example: A stock purchased at ₹1,000 growing at 15% annually could be worth around ₹2,010 in five years, showcasing the compounding effect.

While growth stocks can be rewarding, they also carry significant risks investors should consider:

• Valuation Risk: They often trade at high price-to-earnings multiples, leaving less margin for error.
  

• Volatility: Prices can swing sharply due to changing investor sentiment or earnings surprises.
  

• No Dividends: Most growth stocks reinvest profits, meaning investors rely solely on price appreciation.
  

• Economic Sensitivity: During downturns or rising interest rate cycles, growth stocks may underperform.
  

• Overhyped Expectations: If a company fails to meet projected growth, its share price may correct steeply.
  

Example: A stock trading at ₹1,200 with earnings of ₹20 per share has a P/E of 60. If earnings growth slows and the market resets the P/E to 30, the stock price could fall to ₹600 despite stable profits.

Growth stocks represent companies that prioritise reinvestment and expansion, and may deliver long-term returns. They may attract investors interested in capital appreciation and exposure to innovation-driven industries. However, these opportunities come with risks such as high valuations and price volatility.

Illustration: An investor buying a growth stock at ₹500 that compounds earnings at 20% annually might see the value rise to ₹1,240 in five years. Conversely, if growth expectations falter, the same stock could drop back near its original price, reflecting how sentiment drives valuations.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.