Glossary
Growth Stock
Stock of a company expected to grow fast
A growth stock belongs to a company whose revenue and profit are rising faster than the market average, or are expected to. You are buying what it will earn rather than what it earns today.
That is why the P/E looks high. The price seems expensive against current profit because it already prices in the years when profit could be several times larger. Dividends are rare; earnings go back into the business.
The risk shows up when expectations slip. A small slowdown can collapse the price, because the premium rested on hope rather than results. Shares often fall not on bad numbers but on numbers that were merely less good than forecast.
They are also sensitive to interest rates. Valuing distant future profit in today's money means higher rates discount that future more heavily, which is why growth names swing hardest when rates rise. So when buying growth, work out how far it could fall if the story breaks before you work out how far it could rise.