A typical growth stock is one with high price to earnings ratio (P/E Ratio), no dividend payments and in high growing sectors like technology. Growth stocks are generally more volatile than the rest and are expected to significantly increase in value overtime.
Most of these stocks don’t pay dividends because the companies prefer to reinvest profits to further increase growth. Investors in growth stocks are not looking for regular cash flows from dividends but in significant capital gains from the selling of their shares at a higher price in the future.
Growth Stocks Explained
Famous growth stocks comprise Amazon, Meta, Alphabet, Apple, Netflix and Tesla. Growth stocks are particularly sensible to economic cycles, which means that they increase substantially during good times and can fall as dramatically during bad ones.
That’s also why they are considered kind of a barometer for risk sentiment because investors would buy them if they expected good economic times ahead and sell if they were downbeat on future prospects.
This is where the classic comparison between growth and value stocks gets more attention. Value stocks pay dividends, and they are generally well priced with P/E ratios being low.
These, among other factors, make value stocks perform better than growth stocks during market turmoil. Investors that look to hedge their risk or diversify generally invest in both the types of stocks to limit their exposure to such economic cycles that are natural and pretty common.
