Definition§
Performance stock, also known as growth stock, is a type of equity in a company that investors believe has strong potential for future growth and increased value. These stocks typically reinvest earnings into the business rather than paying substantial dividends and are expected to deliver significant capital appreciation.
Examples§
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Amazon (AMZN): Amazon has historically chosen to reinvest its earnings into expanding its operations, technology, and market reach rather than paying dividends, making it a classic example of a performance stock.
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Tesla (TSLA): Tesla is another example where the focus has been on growth and expanding its market and product line, often foregoing dividends in favor of reinvestment in the company’s revolutionary technology and infrastructure.
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Alphabet Inc. (GOOGL): Alphabet, the parent company of Google, has consistently reinvested its profits into research and development of new technologies, making it a fundamental growth stock.
Frequently Asked Questions (FAQs)§
Q1: What distinguishes a performance stock from a value stock?
A1: Performance stocks focus on significant future growth and reinvest earnings rather than paying dividends. Value stocks, in contrast, are typically considered undervalued based on fundamentals and often pay more substantial dividends.
Q2: Why do performance stocks typically not pay high dividends?
A2: Performance stock companies reinvest profits to fuel future growth and expansion rather than distributing them as dividends to shareholders.
Q3: Are performance stocks more volatile than other types of stocks?
A3: Yes, performance stocks can be more volatile as their high growth potential can be associated with higher risk, often causing more significant price fluctuations.
Q4: How should an investor evaluate performance stocks?
A4: Investors should look at factors including revenue growth, profit margins, market conditions, the company’s competitive edge, and innovations when evaluating performance stocks.
Q5: Are performance stocks suitable for all types of investors?
A5: Performance stocks are generally more suitable for investors with a higher risk tolerance seeking long-term capital appreciation rather than immediate income through dividends.
Related Terms§
Growth Stock: A stock anticipated to grow at an above-average rate compared to other companies.
Value Stock: A stock trading at a lower price relative to its fundamentals, such as dividends, earnings, or sales.
Capital Appreciation: An increase in the price or value of assets.
Dividends: Payments made by a corporation to its shareholder members, usually a portion of the corporate earnings.
Equity: The value of an ownership interest in the company, usually represented by stocks.
Online References§
Suggested Books for Further Studies§
- Common Stocks and Uncommon Profits by Philip Fisher
- The Intelligent Investor by Benjamin Graham
- One Up On Wall Street by Peter Lynch
- Growth Investing by Glen Arnold
- Growth Stocks by Richard Koch
Fundamentals of Performance Stock: Finance Basics Quiz§
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