Growth stock investing is a typical way to long term investing. When we hear the phrase “stock market”, we might think of shares being traded every day. But trading in stock market is different from growth stock investing. In trading, traders only take advantage of the stock’s price fluctuation. Normally, a trader buys a stock at a lower price and sells at a higher one. Profit comes from the price margin or from the resulting balance between the buying and the selling price. In growth stock investing, it is not only the increasing price of stocks that makes an individual investor buy some shares. The increasing size of portfolio and its dividends are in fact the primary considerations.
Buying some growth stocks begins with identifying the future of a small company. Most people think that large companies are a good bet for investment. In reality, these large companies do not have any more room for growth perhaps because of operational cost. The most probable reason to buy such blue chips is the stability of investment and income. Smaller companies can be a better source of growth stocks. However, not all small companies could become growth stocks. There must be a condition to determine so. Some companies are said to be growth stocks when they are fast growing. Ideally, early buyers are the ones who will benefit the most. Thus, every investor wishes not to be late in his entry.
It must be sought and analyzed why some companies grow so fast. It could be that they are competitive in their respective industry or they just happen to get some opportunities that make them competitive. This competitiveness can be identified by their consistent effort to innovate. Assuming, a company introduces a new product which is unique in the market. After a short period of time, the product becomes popular and the best in the market. Not long ago, the company plans to develop another unique product in order to sustain their market dominance and repeat the same miracle. Since they have proven their credibility, investors will surely line up to buy some shares of such a company even upon the release of the news that the company is said to develop another competitive product. This aggressive innovation can make the company a candidate for becoming a growth stock.
It is recommended that investors start with enough capital when investing in growth stocks. There is no exact amount of what is enough for all investors. But everyone knows what is acceptable for himself. Let us suppose that we started with $50,000. We bought a stock worth $1 per share, so we owned 50,000 shares of a growth stock. After a year, our stock was worth $2 and the dividend was $10%. If the dividend were declared to be a stock dividend, our shares would become 55,000 shares.
Since the market value of the stock was $2, we had a floating investment worth $110,000. In just one year, we gained more than a hundred percent. If we had put the money in a bank, we would have earned only around 10%. In that case, our money would only be $55,000. This example is not a joke. It happens all the time in the US stock market. The important thing an investor should consider is to select the right stock. Therefore, in this scenario, growth stock investing is value investing. Investors should invest in the anticipation of shares valuation. The larger the capital we invest, the higher the value the investment can have.
When the US economy is growing faster, more and more companies benefit. The strongest factor why many companies grow fast is a better business climate. Growth stock investing is a lot easier in such condition. It is the period of expansion not only for certain companies and industries but for the whole economy itself. To begin a growth stock investing, investors should become familiar with the right economic fundamentals that affect the business environment and the performance of stocks in general. Most economic indicators are release monthly, quarterly, and annually. Not all indicators are influential to growth stock investing. But anything that affects the economy in general can directly affect any stock. There are a few economic indicators that we should look at in growth stock investing such as The Federal Reserve rate decision, the Non-Farm Payroll (NFP), and the Growth Domestic Product (GDP), and global economic news.
The Federal Reserve rate cut encourages risk appetite for investment in equities or stock market. It may also imply that the inflation is not any more a threat to the health of the economy. Sometimes, even without a rate cut, any dovish statement of the Fed chairman favoring a potential rate cut can move the market sentiment. Meanwhile, a hawkish comment favoring a possible rate hike creates risk aversion or a sentiment that the economy is overheating and the inflation is threatening the general health of the economy. A rate hike is a strong warning that the growing economy has reached the limit. Therefore, it is highly risky for growth stock investing.
Another influential fundamental indicator is the Non-Farm Payroll. It shows whether or not new jobs are create within a certain period of time. When NFP result is higher than expected, it implies expansion. It means that jobs are add to the payroll of most companies because of the growing demand of their products and services. Additional jobs can also mean more buying power of the consumers. This is the reason why the Dow Jones and S&P500 react heavily every time the NFP data is release. When the NFP data is better than expected, it is also a better timing for growth stock investing. However, this data can make or break a stock position. If the actual result is much lower than the previous one, the value of stocks will surely decline.
On the other hand, the GDP is one of the most reliable data to measure the growth of the economy. Upon the release, stock prices fluctuate. If the GDP is higher than the previous, investors may take advantage of the overall health of the economy. But sometimes, the GDP is not that influential. In fact, it is a little risky for growth stock investing especially when the GDP is increasing along with the higher inflation. However, the annual GDP result is a lot helpful for a long term growth stock investing. It shows that the economy has already gone far and the fundamentals are strong. So, it is safe for any long term growth stock investing.
Global economic issues can somehow affect the US stock market. Most large companies in the US have widespread international exposure. In the New York Stock Exchange, most stocks, being trade every day, are multinational companies (MNC) with operations around the world. Any good or bad news abroad can move the US stock market. One good example is the Euro-zone debt crisis. There are a lot of American companies operating in Europe. So, when the price of the Euro goes down, so does the S&P500 or vice versa.
It is therefore ideal for growth stock investing when there is no problem around the world. But there are some investors who have different attitude toward growth stock investing. They buy stocks on dip and they sell on rally. These contrarian investors trade during the worst time because they believe that the cheapest stock price is the best start for any growth stock investing. And after quite some time, they sell when everybody is willing to buy.