Stock Market for Beginners

When looking for a potential growth stock investment, think of yourself as an investor looking for a business to become part owner. As part owner, you are not looking to sell your business right away, so you will seek out long term investments that have the highest potential to outperform at the most reasonable prices. Make sure that the growth is consistent to avoid investments that are hot or trendy and try to follow a very strict set of criteria when doing your analysis.

Although there are numerous growth companies with various sizes in different stages of development to consider, a primary criterion that investors should focus on is the stability of revenue growth. First off, investors should seek out leading companies in their industry. This may be indicated by high-volume, low cost production, strong sales, and price flexibility to accommodate an inflationary economy. The effectiveness in developing new products is essential because it is a strong assurance of long term success with an ever-changing market environment. Companies that are able to grow sales faster than the growth rate of the general economy are favorable.

On average, the U.S. economy’s output has averaged 5.4% over the past ten years and companies growing at a faster pace than the general economy have proven to be worthwhile investments. Strong profitability and large profit margins are imperative because they signify the company’s potential to reinvest into the business or to acquire other companies for the purposes of further growth and expansion. In order for a company to grow, funds are required for expansion; thus, funds generated from profits are more preferable than funds raised from debt. Strong financial statements indicate a healthy, growing company and can create a confident financial stance within the industry.

To successfully invest in growth stocks, you must invest in rising, prospering companies at reasonable valuations. Purchasing quality growth stocks when the price/earnings ratio is at or below the company’s estimated long term growth rate for sales and earnings reduces risk. Also look for companies that have a long upward trend in their stock price, demonstrating consistency in management’s performance.

Growth stock investing requires a long term commitment in order to retrieve desirable profits. The 2006 issue of Forbes: The 400 Richest Americans showed that people like Bill Gates and Michael Dell observably earned their wealth through accumulated equity ownership and a long term commitment. Therefore, be like them and accumulate equity in companies with certain characteristics that make them successful and be committed to them for the long run. Maybe one day in the future, your name will be on the list.

Share This