Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Growth Company

What it is:

Growth companies are fast-growing, higher-risk companies. They tend to be young. Their stocks offer a higher chance of higher returns and a higher chance of losses.

How it works (Example):

The nature of a company's business determines many of the characteristics of its stock, especially for growth companies. For example, blue-chip stocks are stocks issued by high-quality, large companies and generally have steady dividend payments. Their values don't "jump around" as much as shares of smaller, riskier companies like growth companies, generally speaking, and so conservative investors who like dividend payments and not much risk tend to avoid growth companies.

Growth companies are generally riskier than other types of companies, but their stocks also offer a chance at very high returns. These returns are often in the form of capital gains rather than dividends. Tech companies are generally good examples of growth companies -- they tend to reinvest all excess cash into their businesses and rely heavily on research and development of products that can be very lucrative but easily outdated.
 

Why it Matters:

Deciding whether to buy stocks of growth companies, or which growth stocks to buy requires you to consider your goals in life, your age, your cash needs, future cash needs you might have (retirement, college, etc.), your tax situation, the nature of your other investments, and how much risk you're willing to take. For those willing to tolerate the risk, the rewards can be quite large (and the losses can be quite large).