finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

, a growth stock is a

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

of a company that generates substantial and sustainable positive

cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...

and whose

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...

s and

earnings Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before interes ...

are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of

competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...

(a new product, a breakthrough patent, overseas expansion) that allows it to fend off competitors. Growth stocks usually pay smaller

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

s, as the companies typically reinvest most

retained earnings The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...

in capital-intensive projects.

Criteria

Analysts compute

return on equity The return on equity (ROE) is a measure of the profitability of a business in relation to the equity. Because shareholder's equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on '' ...

(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.

CAN SLIM CAN SLIM refers to the acronym developed by the American stock research and education company ''Investor's Business Daily'' (''IBD''). ''IBD'' claims CANSLIM represents the seven characteristics that top-performing stocks often share before making t ...

is a method which identifies growth stocks and was created by

William O'Neil William J. O'Neil (born March 25, 1933) is an American entrepreneur, stockbroker and writer, who founded the stock brokerage firm William O'Neil & Co. Inc in 1963 and the business newspaper ''Investor's Business Daily'' in 1984. He is the aut ...

a stock broker and publisher of ''

Investor's Business Daily ''Investor's Business Daily'' (''IBD'') is an American newspaper and website covering the stock market, international business, finance and economics. Founded in 1984 by William O'Neil as a print news publication, it is owned by News Corp and is ...

''. In academic finance, the

Fama–French three-factor model In asset pricing and portfolio management the Fama–French three-factor model is a statistical model designed in 1992 by Eugene Fama and Kenneth French to describe stock returns. Fama and French were colleagues at the University of Chicago Booth ...

relies on

book-to-market ratio The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value (where ''book value'' is the value of all assets minus liabilities owned by a company). The calculation can be performed i ...

s (B/M ratios) to identify growth vs. value stocks. Some advisors suggest investing half the portfolio using the value approach and other half using the growth approach.

References

External links

How to Find the Ultimate Growth Stock
Fundamental analysis Stock market {{finance-stub

Criteria

See also

References

External links