What it is:
A growth company is characterized by a rate of growth higher than that of the overall economy.
How it works (Example):
Growth companies generate consistently high levels of earnings, and place greater weight on reinvesting earnings in continued expansion. They tend to be relatively young companies with ambitious product strategies and plans to grow.
Growth companies are exceptionally common in the technology sector. Companies like Google (Nasdaq: GOOG) have consistently posted increased revenues and earnings since going public. Because their business is growing rapidly, Google and other growth companies are expected to continually increase profits as well, which theoretically lead to increasing share prices.
Why it Matters:
Since growth companies tend to reinvest nearly all of their retained earnings in continued expansion and market capitalization, growth companies distribute very little, if anything, via dividends. Therefore, they are often unattractive for income investors.
For investors, the appeal of growth companies comes from the expected increase in stock price as the company grows, i.e. capital gains.