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What is a Growth Company?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 25 September 2016
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A growth company is a company with earnings that are increasing at a rate faster than the economy in general. Such companies are rapidly accelerating their rate of earnings and tend to reinvest the bulk of their earnings, in contrast with paying out dividends to shareholders. Eventually, such companies level out and begin to experience more regular earnings rates, growing slowly and steadily over time.

Investment in a growth company is often viewed as appealing. The share prices are usually steadily rising along with the company's profits, and people may attempt to buy shares early on in order to be positioned to profit when the share prices increase. Investment at the ground level of a new and growing company can position people well for the future and may be an important component of some investment portfolios. There are several mutual funds based on investing in groups of growth companies for investors who prefer this option.

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Some industries are growth industries, with an overall rate of growth that outstrips the economy in general. Within a growth industry, a growth company is a company that is growing even faster than the rest of the industry, in addition to the economy. Such companies are positioned to become leaders in the field and they may have fierce competition from rivals that are interested in promoting some growth of their own. Investment in growth companies and industries can sometimes create a bubble, something that investors need to be aware of when considering potential a investment in a growth company within a booming industry.

More mature companies and industries tend to have a sedate rate of growth. After a period of rapid expansion made possible by innovation, identification of new areas of the market share, and aggressive business tactics, growth tends to slow to a more regular rate. Such companies can start paying dividends instead of reinvesting their profits because they are large and stable enough that they do not need to sink their profits into expanding research and development and repaying of loans. For investors who held their stock throughout the growth period, the mature company can turn into a regular source of dividend income.

Financial publications usually provide information about growth companies, including their history and projections for their future. This information can be used by investors and analysts to make decisions about whether to invest in a growth company and when to sell stock to take advantage of increases in value before the stock price begins to level off.

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