Ben Todd | Jun 2, 2017 | 0
How You Should Be Investing In Growth Shares If You Want To Build Wealth
You can invest in shares, you can invest for income where you buy shares and they pay you dividends. If you want to save your money without letting inflation eat away at it, then invest in larger and more established companies that have more expensive shares (large caps/blue chips). If you want to invest so that your investment grows to build your wealth, then you need to invest for growth–and here is how you do it.
Invest Consistently And Think Long Term
Thinking long term is one way of building wealth. It means putting your money into buying shares in a company and leaving your money there for what may become decades so that the return on your investment is optimized to the fullest. If you are not comfortable with investing in shares and not seeing the share price move for five years, then you may not have the stomach for growth investing.
Isn’t There A Quicker Way?
Yes, you invest in small caps. These are smaller and newer businesses. Their share prices are often very cheap to the point where some are less than a cent. The small caps have a long way to grow, which means when you sell the shares you bought for a cent may be worth tens of dollars. Small caps may also grow very quickly, which means there are times when you can buy and sell within a few months.
The only downside is that small caps are unreliable and risky. They are often used by people for pump and dump schemes where the price is artificially inflated so the main stockholders can make a quick profit from a sale. Smaller and newer companies also tend to go bust more frequently.
How Should You Do It?
The easiest answer is that you invest in mid cap businesses. These are established businesses. Many of them that turn over millions of dollars per year, and many have been established for years. They have share prices that cost dollars rather than cents, but they still have a fair amount of potential growth in them. They may or may not issue dividend payments, but getting dividends is not your main goal, it is just a perk you may or may not experience.
What Are Growth Shares And Value Shares?
Growth shares are shares in companies that are growing, and this is reflected in their share price because it is rising faster than the stock market average. Growth shares should experience growth within the next 1 to 4 years, whereas value shares have less risk but it will take them longer than 5 years to see enough growth for you to sell for a profit.
The Best Way To Go About It
Think of it as buying a company when you stock in a company. If you were buying a company, you may check its balance sheets, its online reputation, the attitude of its managers and so forth. Your aim is not to go for shares with the best prices; it is to go for companies that you know are good solid companies. Such companies are not as difficult to find as you think.
You may use a company at home all the time. You may appreciate their products, you may read few negative reviews about them, and you may hear that your friends use their products all the time too. All you have to do is find out about their balance sheets, how much debt they are in, and how well they are doing in general. If they are a large cap or blue chip company (a long established and large company) that has little room for growth in the next 1-4 years, then move on to another company. If they are a mid-cap company, and everything else checks out about them, then invest in share in their company.
You know from experience that they are probably not going to go bust any time soon; you know their products are good, and you will easily be able to stay up-to-date on their progress. You will notice if their product start appearing or disappearing from shelves or if their prices suddenly go up.
The Long-Term Approach
Obviously, you cannot restrict your investing to companies you use directly because you will soon run out. If you are investing and taking the long-term approach, you will have to start finding other mid cap companies to invest in. Doing your research and thinking of the process as you buying a company is a good place to start.
Check Their Sales
If they are selling a lot, then that is good. However, if their competitors are also doing well, then the company may not see much growth. They need to be selling more frequently or more units than their competitors.
Internet companies have shown us that they can sell a lot without making any real profit. If the company is not earning more and more as the years go on, then their share price is unlikely to grow.
If their debt is less than last year, then this is a good sign. If their debt is growing then there had better be a very good reason such as because they have been expanding in a very positive way. Debt is a tricky area because some of the world’s biggest brands have been in debts equal to the national debt of some smaller companies during their lifetime and yet they didn’t go bust.
Are They Leaders?
The best example is during the period of time when Apple invented the Smartphone. They were struggling up to that point, but then created one of the biggest trends of our time.
Are They Part Of Mega Trends?
The first few companies to start selling DVDs went big in a massive way as the DVD trend took off. Now that DVDs are all becoming extinct, let’s hope that investors sold at the right time.
Does The Company Have A Strong Brand?
If a company has a strong brand, then it can usually weather the sort of storms that would cast other companies adrift. For example, McDonalds have seen more high-profile cases and slur campaigns than any, including a movie on how “bad” they were, and yet they are still going. Pepsi had a strong brand when it overcame the “syringe in the bottle” hoax that flared up in various US states.
What Are The Barriers To Entry?
Some companies make it difficult to compete with them. For example, a few years ago there were few companies that could compete with UPS and the Federal Express because of the delivery network they already had in place.
What Is Their Research & Development Like?
Like the other examples in this section, Microsoft is by no means a mid-cap company, it is the bluest of blue chip companies. But, in their early fledgling days, it was their research and development that put them ahead of some of the world’s biggest companies at the time.
What Is The Current Herd Mentality?
Shares go up when more people want to buy them than want to sell them. If pension funds are investing in a company, or big buying groups are investing in stock in a company, then the price will go up.
Consumer Publications And Online Reputation
If the company you are going to invest in is seeing a lot of positive attention from consumer websites and publications, and they have a good online reputation that is not creaking under the weight of negative reviews/testimonials, then they may see some growth soon.
Analyst, Broker And Tipster Recommendations
Believe it or not, despite the unreliability of online analysts, tipsters and brokers that give away free advice/tips, they are still followed by a lot of people. Online influencers create a self-fulfilling prophecy where they say a share will do well, so people quickly buy the shares and the price subsequently goes up.
Remember The Stock Market Has An Impact
If there is a bull market, where stock prices are rising on average, then consider growth shares. If there is a bear market, where stock prices are going down on average, then switch to more stable and reliable companies that have a lower risk.
Remember that some sectors may be seeing growth whilst others are seeing a degree of recession. Many times the stock market doesn’t move in one direction at the same time. For example, even during the global economic downturn, discount food stores did very well and so did repossessions companies.
Remember that a bull market is a little more to do with investor confidence than it is with actual numbers. Where a bear market is usually defined as a 20%+ drop that is often accompanied (or preceded by) negative investor confidence and investor restlessness that causes them to sell without any tangible reason.
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If you are very concerned about losing all your money, then set up a stop-loss order with your broker. This will mean your shares are sold if they ever dip lower than a price you determine. Make your stop-loss order a Good-Till-Cancelled order (GTC), to make sure the stop-loss order stays there indefinitely until it is either activated or you decide to sell yourself.