Growth Stock

Any stock that appreciate in value at a rate above the market average and that offers a high return on equity is classed in financial terms as a "growth" stock. Return on equity is calculated by dividing a company's net income by its equity. For a stock to receive the "growth" classification, stock market analysts would look for a minimum fifteen percent return on equity.

With growth stocks the return on equity normally comes from appreciation of the original investment or from earning retained and reinvested. (Dividends are seldom issued on growth stocks.) Today many technology offerings are growth stocks.

Typically growth stocks will be characterized by low yields and high price/earning ratios. Companies with the need to reinvest the majority of their profits back into the business are those most likely to issue growth stocks. To a large extent the price of a growth stock is a reflection of the investor's belief of the stock's future ability to generate earnings.

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