Growth stocks are associated with high-quality, successful companies whose earnings are expected to grow at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. The P/E ratio is the market value divided by the current year’s earnings per share. For example, if the stock is trading at Rs 500 per share and its earnings over the last 12 months have been Rs 25 per share, its P/E ratio is 20.
Share market often places a high value on growth stocks. Therefore, investors value these stocks more and are usually willing to pay more.
Investors who purchase growth stocks receive returns in the form of capital gain. A capital gain is an increase in price over the purchase price of a stock. Such investors do not look for dividends. Although dividends are sometimes paid to shareholders of growth stocks, it has been more common for growth companies to reinvest earnings in capital projects. Due to reinvestment, companies can make more profit, increasing the market value of shares. Market places high value on such companies as they show the potential for earnings growth.