Growth stock

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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.[1] 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 companies typically reinvest most retained earnings in capital-intensive projects.

Criteria[edit]

Analysts compute return on equity (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.[2] CAN SLIM is a method which identifies growth stocks and was created by William O'Neil a stock broker and publisher of Investors Business Daily.[3]

In academic finance, the Fama–French three-factor model relies on book-to-market ratios (B/M ratios) to identify growth vs. value stocks.[4]

Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.[5]

See also[edit]

References[edit]

  1. ^ "Top Growth Stocks". InvestingDaily.com. Retrieved 2010-06-03.
  2. ^ "Sivy on Stocks". CNNMoney.com. 2004-08-06. Retrieved 2004-08-18.
  3. ^ O'Neil, William J. (2002). How to Make Money in Stocks: A Winning System in Good Times or Bad. The McGraw-Hill Companies. ISBN 978-0-07-137361-6.
  4. ^ Fama, Eugene F.; French, Kenneth R. (1998). "Value versus Growth: The International Evidence". The Journal of Finance. American Finance Association, Wiley. 53 (6): 1975–1999. doi:10.1111/0022-1082.00080. ISSN 0022-1082. JSTOR 117458. Retrieved 2021-12-28.
  5. ^ "Multi-Style Investing: A Tale Of Two Investment "Styles"". Bernstein Global Wealth Management. 2004-07-22. Archived from the original on 2012-09-07. Retrieved 2009-08-20.

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