Growth stock
Encyclopedia
In finance
, a growth stock is a stock
of a company that generates substantial and sustainable positive cash flow
and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.
(ROE) by dividing a company's net income into average common equity
. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity. CAN SLIM
is a method which identifies growth stocks and was created by William O'Neil
a stock broker and publisher of Investment Business Daily.
During the rest of the years, the value stocks have done better. Note that the 5 years preceding the dot-com bubble
burst, growth stocks did better than value, since then value stocks have generally done better.
Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, a growth stock is a stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
of a company that generates substantial and sustainable positive cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage (a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.
Criteria
Analysts compute Return on equityReturn on equity
Return on equity measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity . ROE shows how well a company uses investment funds to generate earnings growth...
(ROE) by dividing a company's net income into average common equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
. To be classified as a growth stock, analysts generally expect companies to achieve a 15 percent or higher return on equity. CAN SLIM
CAN SLIM
CAN SLIM refers to the seven-pronged mnemonic publicized by the American newspaper Investor's Business Daily, which claims to be a checklist of the characteristics performing stocks tend to share before their biggest gains...
is a method which identifies growth stocks and was created by William O'Neil
William O'Neil
William J. O'Neil is an American entrepreneur, stockbroker and writer, who founded the business newspaper Investor's Business Daily and the stock brokerage firm William O'Neil + Co. Inc...
a stock broker and publisher of Investment Business Daily.
Growth vs. Value investing
Since 1982, the growth stocks have beaten value stocks during:- 1982
- 1985
- 1987
- 1989-91
- 1995-99
- 2007
- 2010
During the rest of the years, the value stocks have done better. Note that the 5 years preceding the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
burst, growth stocks did better than value, since then value stocks have generally done better.
Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.
See also
- FinanceFinance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
- Financial ratioFinancial ratioA financial ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization...
- P/E ratioP/E ratioThe P/E ratio of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share...
- Turnaround stockTurnaround stock-External links:**...
- Value investingValue investingValue investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis...