About Growth Stocks
Financial planning takes knowledge of markets, investment vehicles, risk, specific goals and a little bit of luck. High growth stocks are an investment vehicle that can be high risk. However, they may also provide high returns on your investment. You do not have to completely rely on luck here, though. There are ways for you to identify growth, consider the state of a company or market and calculate the net present value (NPV) of your investment to decide if it makes sense for you. The following article walks you through some of these considerations.
Other People Are Reading
-
Identifying Growth
-
There are varying degrees of growth in the stock life cycle. You may have super normal growth, which is usually found at the beginning of the life cycle; normal growth, which matches market performance; zero growth, meaning the stock/industry/market may have matured; or declining growth, which means your stock is going the wrong way---in most cases, anyway. It could be an opportunity to offset any capital losses. If your annual dividends are large enough to offset what you are losing on the price, the investment may provide a positive return.
Magnitude of Growth
-
Stock quotes, which may commonly be found in the business section of your newspaper, on websites of publicly traded companies or on index sites, such as NASDAQ or the New York Stock Exchange, illustrate the magnitude of growth. You may monitor trading activity throughout the day. A stock quote will tell you the opening price of the stock, the current price (from the previous day in newspapers or minutes earlier online), high price for the day, low price, change in price from the opening and percent change. The stock quote will also tell you about the 52-week high or low, as well as how much it has grown or fell in the past year.
-
Time Frame
-
It is inaccurate to assume that "growth" stocks will grow forever, since they typically go through life cycles. For many companies, growth will be much faster in the first few years, then they match the economy's growth and, finally, matures. Non-constant growth formulas may be used to account for such (many) life cycles. To calculate, use a financial calculator to compute the following: 1) estimate the expected dividends for each year during the period of non constant growth, 2) find the expected price of the stock at the end of the non constant growth period, and 3) find the present values of the expected dividends during the non constant growth period and the present value of the expected stock price at the end of the non constant growth period. The sum will give you the intrinsic value of the stock.
Warning
-
Just like gravity, what goes up often must come down. The same is true for stocks. If you are investing in an individual stock versus a stock index, make sure that you research the company's operations, past performance and future outlook via news and annual reports. How accurate are their assessments? What are they saying that backs up their forecast growth? Don't just pick up a couple newspapers or read a ticker online that only highlights recent activity.
Effects
-
Growth stocks bring about more than just personal financial wealth (or destruction). They also signal overall economic growth or decline. When stocks go up or down, consumer confidence is affected, which affects a host of other economic indicators. They can bring happiness to family, too. Strike it rich with good timing of a super normal growth stock, and it will bring a smile to your face.
-
