Looking for Price Appreciation? Look into Growth Stocks
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Growth stocks provide a way to invest now in companies that may be poised for future success. While investors seeking regular dividend payments may wish to invest in income stocks, growth stock investing is a good choice for investors seeking share price appreciation. Rather than pay out sizable dividends, growth companies typically reinvest their earnings back into the business. Thus, growth companies’ revenues and earnings are expected to increase more rapidly, which generally leads to share price appreciation. For a growth investor, current income is less important than a company’s continued growth. I would like to share three examples with you, McDonald’s, Motorola, and Apple. Here are three stocks that I bought long ago and at times it seemed like a long, long wait. As a matter of fact, I had to wait so long for McDonald’s and Motorola that I wanted to throw in the towel. But I reminded myself that in order to succeed I must stick to the plan. Believe me it wasn’t easy. The wait was very, very long but as always with Allah’s blessing patience finally paid off.
Emerging-growth companies are smaller and less well capitalized than the average growth company. As they become larger, many emerging growth companies can be found in the high-technology sector. Investors in emerging growth companies must have a high tolerance and be willing to accept greater portfolio volatility than those who invest in income stocks or regular growth stocks. Some examples are Enpoint, Net2Phone, and Exodus.
Growth stocks frequently trade at price-to-earnings ratios that are significantly higher than those of the market as a whole. In other words, investors pay a substantial premium for stocks considered to offer above-average earnings growth potential. One of the challenges faced by growth stock investors is that it is often difficult to forecast earnings accurately. As a result, growth stocks tend to have extreme up-and-down price fluctuations if projected earnings are exceeded or if earnings are disappointed versus estimates.
Monitoring Growth Stocks
Investors usually want to review their growth stock holdings regularly to make sure the companies’ prospects continue to justify premium price-earnings ratios. Often, by the time growth opportunities are recognized by the general public, stock prices have been drive up and price-to-earnings ratios are no longer as attractive. As a result, the potential for further appreciation decreases. In general, you should only consider growth stock investing if you are more interested in share price appreciation than income. If you are a conservative equity investor, you can participate in growth stocks by staying with high quality blue-chip names. If you are an aggressive investor, you can seek out opportunities among the smaller emerging-growth companies.
These types of companies are extremely volatile. You need a very strong stomach. They are not for everyone and can be very risky. Before you invest in any of these types of companies, please keep the following in mind: volatility, risk, and time frame. You should only invest your risk money into these types of companies. As always before investing do your homework thoroughly.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)