https://509c15d1d91ddadc795b-ff18b12de38230f21de990afdf261633.ssl.cf5.rackcdn.com/wp-content/uploads/i-redbarsarrowupdollarsigns.jpg

Growth stocks are publicly traded companies that are still, just as the name suggests, in their growth phase. These types of stocks are in contrast to value stocks, which are simply companies that are trading a discount to their real value.   

Since growth companies are focused on expansion, they reinvest all of their profit back into the business instead of paying a dividend to shareholders.

# What does business growth look like?

Let’s say you become a business owner by starting a very small bakery. 

https://s-media-cache-ak0.pinimg.com/736x/e8/dd/23/e8dd235ecd4ca54d7bddad5590ecc0f2--bakery-shops-bakery-cafe.jpg

After a month of selling fresh baked goods and paying all expenses, you turn a decent profit, congratulations! You now have a choice as the sole shareholder. You can pay yourself a dividend from those profits, or you can reinvest those profits back into the bakery. You upgrade your equipment which allows you to produce more goods and in a shorter amount of time. This gives you more goods to sell which brings in more profit. You’ve gotten too big for the space you’re in so it’s time to move to a new location with more room. 

https://www.daltonsbusiness.com/uploads/images/420601_420700/420642_d5c4418829189f05/busy-bakery-in-somerset_1000X750.jpg

Even with higher rent, you’re able to produce even more goods which in turn brings even higher profits. Things are booming so much in fact, you realize that you need to open a second location in a different part of town using your increasing profits.  

http://www.bakehouz.com/wp-content/uploads/2017/04/9bb5b89d14ac87e6fa3a9231beaf3365.jpg

This is what classic business growth looks like. For any business to grow, they must reinvest their profits(or in the very early days, their time) into the specific inputs that will bring a greater profit in the future. This can mean upgrading equipment, marketing/sales, or many other things. This can also include cost-cutting measures which improve profit margins, but that doesn’t necessarily imply money being spent on such measures. 

So growth stocks allow investors to take part in this type of classic business growth. Growth companies are ones that have some kind of edge, but still have lots of room to expand market share in their given industry.  

http://advisoranalyst.com/glablog/wp-content/uploads/2016/03/ct-personal-finance-fang-stocks-20160208.jpg

These types of stocks come in many sizes. Examples of large cap growth stocks would be Netflix, Amazon, Google, or Facebook. Small cap examples would include Dunkin Brands Group, Dominos Pizza, or Transunion just to name a few. In general, the smaller the company the more room for growth. So small cap growth stocks can offer even more potential growth, but they also add more risk. A company that small might picture itself growing by leaps and bounds in the future, but if they fail to do so then shareholders will suffer losses.    

Below is a comparison of Vanguard’s small-cap growth ETF, VBK, and the S&P 500 index to give you an idea of the potential that smaller growth companies have. 

https://image.ibb.co/mrcBUv/smallcapgrowth_vs_s_p.png

There is also a tax advantage for investors who choose growth stocks. The fact that these companies usually don’t pay any dividend means that only a capital gains tax would be triggered, not a dividend income tax. This means that these kinds of stocks can be more conducive to speculating rather than buy and hold. 

Thank you for checking out the article, hope you enjoyed.

*This post is not intended as financial advice, it is for informational purposes only.

Pic Sources:
http://www.bakehouz.com/big-cupcakes-bakery/
https://www.daltonsbusiness.com/sandwich-shops-for-sale/busy-bakery-in-somerset-somerset-uk/420642
http://advisoranalyst.com/glablog/2016/03/01/the-fang-basket-of-stocks-gets-derailed.html
https://cabotwealth.com/daily/growth-stocks/tuesdays-gdp-number-means-growth-stocks/
https://www.pinterest.com/explore/small-bakery/