Growth stocks are shares in companies with above-average growth potential. These companies are generally characterized by rapid expansion in revenues, profits or market share. Investors who buy growth stocks are betting on significant share price appreciation over the long term, driven by this strong growth dynamic, even though these companies rarely pay dividends, preferring to reinvest their profits to support their development.
Unlike value stocks, which are perceived as undervalued in relation to their fundamentals, growth stocks often trade at high valuation multiples, such as above-average price/earnings (P/E) ratios. This valuation premium is justified by expectations of future earnings or sales growth. The technology and healthcare sectors are often home to many growth stocks, where innovation and disruption enable certain companies to grow at an accelerated pace.
Growth companies are often leaders in rapidly expanding markets or new emerging sectors, such as high-tech, biotech or online services. Companies such as Amazon, Tesla or Google are emblematic examples of “growth stocks”, having experienced meteoric growth and spectacular rises in their share prices over the past few decades.
However, growth stocks also entail risks. Due to their high valuations, they are often more sensitive to market fluctuations and periods of economic uncertainty. A slowdown in growth, higher interest rates or disappointment with investor expectations can lead to major corrections in the price of these stocks.
Despite these risks, growth stocks continue to attract investors who are prepared to accept greater volatility in exchange for the potential of higher long-term returns. This strategy is based on the idea that growth in a company’s revenues and earnings will lead to an increase in share value, offering substantial gains to those able to hold out over the long term.
