Investing in the Stock Market 101
- Introduction to Investing
- Principles of Investing
- Types of Investments
- How to Read Financial Statements
- Building an Investment Portfolio
- Strategies for Long-Term Investing
- Preparing for Market Uncertainties
Principles of Investing
Principles of Growth Investing
Value of earnings per outstanding share of common stock for a company.
Growth investing is a strategy that focuses on capital appreciation. Investors who follow this strategy seek companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In this unit, we will delve into the principles of growth investing.
Understanding the Concept of Growth Investing
Growth investing is all about buying stocks in companies that are expected to grow at an above-average rate compared to other companies in the market. The primary goal of growth investing is to achieve capital gains rather than earning dividends. Growth investors invest in companies that reinvest their earnings into further business expansion, research and development, or acquisitions, rather than paying out a large portion of profits as dividends.
The Importance of a Company's Earnings and Sales Growth
Earnings and sales growth are two of the most important factors for growth investors. A consistent history of earnings and sales growth is a good indicator that a company will continue to grow in the future. However, it's also important to look at the quality of earnings and the sustainability of sales growth. For example, one-time events such as the sale of a business unit can inflate earnings, while unsustainable sales practices can lead to future problems.
The Role of Innovation and Market Disruption in Growth Investing
Innovation and market disruption play a crucial role in growth investing. Companies that can innovate and disrupt their markets often have the potential for rapid growth. These companies can create new markets or radically change existing ones, leading to significant opportunities for growth. Examples of such companies include tech giants like Apple and Amazon, which have consistently innovated and disrupted their respective markets.
Evaluating Growth Stocks: PEG Ratio, ROE, and Other Key Metrics
When evaluating growth stocks, there are several key metrics to consider:
- Price/Earnings to Growth (PEG) Ratio: This ratio takes the P/E ratio and divides it by the growth rate of the company's earnings. A lower PEG ratio could indicate that a stock is undervalued.
- Return on Equity (ROE): This measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. A higher ROE indicates a more efficient business.
- Earnings Per Share (EPS) Growth: This measures the percentage change in earnings per share over time. It's a key indicator of a company's profitability.
Case Studies of Successful Growth Investments
Some of the most successful growth investments in history have come from the technology sector. Companies like Amazon, Google, and Facebook have delivered massive returns for growth investors. These companies have consistently grown their earnings and sales, disrupted their markets with innovative products and services, and effectively reinvested their earnings to fuel further growth.
In conclusion, growth investing is a strategy that focuses on capital appreciation by investing in companies that are expected to grow at an above-average rate. It requires careful evaluation of a company's earnings and sales growth, innovation and market disruption potential, and key financial metrics.