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What is a Growth Stock?

Growth stock [1] is a financial term that refers to stocks that belong to companies that have had a history of consistently achieving growth rates beyond projected benchmarks. They also have high profitability ratios.

In order to calculate this, analysts will compute the ROE [2] or return on equity [2] by dividing the company’s net income [3] into average common equity [4]. To be regarded as a growth stock, analysts require that companies must reach at least a 15% or more return on their equity. A common method to approach this calculation is done with “CAN SLIM.” This is a mnemonic device that details and describes the characteristics performing stocks have before they report their biggest gains. They are as follows:

C = Current Earnings should be up 25%.
A = Annual earnings should be up 25% in the last 3 years.
N = New product or service that fuels the earnings growth.
S = Supply and demand [5] can be viewed by looking at the trading volume.
L = Leader or laggard. These stocks should be the leaders in their industry.
I = Institutional sponsorship means the ownership of the stock in mutual funds [6].
M = Market indexes. One should invest when the Dow [7] Jones, S & P 500 and NASDAQ [8] are in up trends.

Growth stock is also sometimes referred to as “glamour stock.” Growth stocks [1] do not generally pay dividends because the company wants to reinvest the returns it receives on stocks. Investors will often find that most technology companies are considered to be growth stocks.