Typically, growth stocks are companies with ambitions to quickly scale by expanding product lines, improving operational efficiency, and achieving first mover advantage. Although these companies can be found in any sector, most are in industries where technology is enabling innovation and the delivery of new services. These industries include cloud computing, e-commerce, financial services and healthcare.
Growth stocks can be both small and large-cap, including big tech stocks listed on the Nasdaq exchange, and have tended to outpace the broader market. They often provide better-than-average returns on investments, which has been demonstrated by growth benchmark indices over the years, such as the S&P 500 Growth Index. However, a growth company’s share price and valuation are usually high relative to its earnings and revenue, and it may not have a history of profitability.
Investors may buy into growth stocks with the expectation that the companies will go on to achieve big things. Most blue-chip stocks started out as growth stocks but have since achieved a steadier rate of growth.