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What Are Growth Stock Funds?

Definition, Example, and Strategy for Growth Stock Funds

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Definition: Growth stock mutual funds primarily invest in growth stocks, which are stocks of companies that are expected to grow at a rate faster in relation to the overall stock market.

Example: Technology stocks are good examples of what stock mutual fund managers buy for their portfolios. When FaceBook stock was first offered to the public in 2012 it's valuation was at approximately $100 billion. The year prior (2011) it earned roughly $1 billion. A simplified valuation represents "present value of future cash flows." In translation, if FaceBook maintained its $1 billion annual income, it would take 100 years for an investor to earn back what they had invested. However, a growth stock investor is betting that a company like Facebook will grow at a much faster rate than most other companies. Facebook is an extreme example but growth stock mutual fund managers are buying stocks of companies that have great "potential" for future earnings above and beyond the overall market.

Strategy: As the name implies, growth stock mutual funds typically perform best in the mature stages of a market cycle when the economy is growing at a healthy rate. The growth strategy reflects what corporations, consumers and investors are all doing simultaneously in healthy economies--gaining increasingly higher expectations of future growth and spending more money to do it. Again, technology companies are good examples here. They are typically valued high but can continue to grow beyond those valuations when the environment is right.

See Also: What Are Value Stock Funds?

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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