Growth stock.
In plain English
A growth stock is a share in a company expected to grow earnings faster than the overall market. The market typically prices growth stocks at higher multiples (high P/E ratios) on the bet that future earnings will catch up to the price. Most growth companies reinvest profits into the business rather than paying dividends. Tech companies dominate the growth category, but growth stocks exist in every sector.
01Why it matters
Growth stocks tend to outperform during expansions and underperform sharply during corrections, when their high multiples compress fastest. Going all-in on growth feels brilliant in a bull market and brutal when the cycle turns. Holding both growth and value funds is one of the simpler ways to smooth a portfolio.
02The math, step by step
Nvidia in 2023 traded at a P/E ratio above 100 as AI demand drove earnings to triple year over year. That valuation was sustainable because earnings actually grew into it. The same valuation applied to a slower-growing company would have been a crash waiting to happen.
03What this is NOT
Growth stocks have high P/E and high expected future growth. Value stocks have low P/E and stable, often mature businesses. The two often take turns leading the market across cycles.