What defines a 'growth stock'?

A 'growth stock' is defined as a stock that is expected to grow at an above-average rate compared to its industry or the overall market. This expectation is typically based on the company's potential for revenue and earnings growth, which is often reinvested back into the business rather than paid out as dividends. Investors are attracted to growth stocks because they seek companies that show signs of strong future performance, often measured through metrics such as earnings per share (EPS) growth, sales growth, and market share expansion.

Growth stocks usually belong to sectors that are experiencing rapid development, such as technology or biotech, where innovation leads to increased profits. Because these companies often prioritize expansion and reinvestment over dividend payments, they do not typically fit the characteristics of stocks that pay regular dividends. Furthermore, growth stocks are not defined by guaranteed returns; instead, they come with higher volatility and risk, as their future prospects can vary greatly based on market conditions and company performance. Lastly, while some may display stable growth, the defining characteristic of growth stocks is the significant expectation of above-average growth.