Growth stocks are associated with high-quality, successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. The P/E ratio is the market value per share divided by the current year’s earnings per share. For example, if the stock is currently trading at $52 per share and its earnings over the last 12 months have been $2 per share, then its P/E ratio is 26. The price-to-book ratio is the share price divided by the book value per share. The open market often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares.
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