Buying Growth Stocks / Mutual Funds

There are two fundamental types of stocks; income stocks and growth stocks. Income stocks are those that produce a high yield, a dividend, and sometimes a high level of capital appreciation. Growth stocks are more volatile, but produce quicker profits—and losses—than income stocks. So, while there are some strong and steady stocks out there giving a nice quarterly or annual dividend there are just as many, if not more, stocks that are expected to show rapid earnings and strong revenue growth. Of course, many of these companies do not gain quickly; rather, they often lose at a rapid pace. This is why growth stocks can be a potentially dangerous investment source.

Growth stocks come in a range of categories, based on total value, as determined by taking the price of one share and multiplying it by the total number of shares outstanding. There are four main types of growth stocks; large-cap, mid-cap, small-cap, and mico-cap. Large-cap companies have a value of over five billion dollars, mid-cap stocks fall between the one billion and five billion mark, small-cap stocks value under one billion but above two hundred and fifty million dollars, and micro-cap stocks represent all the rest below two hundred and fifty million dollars.

• Guide to Mutual Fund Investment

So, which type of stock should you invest in? Some people say the larger the cap, the greater the risk. This is somewhat true—larger sums of money invested can lead to large losses should a company go south. However, they can also lead to large gains after good news, a merge, or a spike in the market. Large-cap companies also have a tendency to be more stable and established than smaller-cap stocks. These large companies have had to build themselves up to reach the highest category; therefore generally the fundamentals of the company are strong. However, nothing is certain on the stock market, and large companies can crumble, and crumble fast.

If the prospect of losing all your money does not intimidate you, you might want to check out the small to micro cap stocks. Investing in smaller-cap stocks will be up your alley if you like researching companies, taking risks, and benefiting from your investigations and intuitions. Small-capitalization growth stocks, as a group, have exceeded, handedly, the overall returns of larger stocks since 1925. Little stocks can result in great gains to their dynamic qualities, but because they react to drastic news they fall rapidly as well. If you need to make money to make your mortgage payments small-cap investment is not the route for you. Smaller-cap stocks are for people who can afford risk, or those with a portfolio that is diverse enough to support a possible loss.

Small-cap stocks are a good investment because mutual funds and institutions cannot often buy them, or if they can, only in small doses. Regulations permit the individual stockholder to invest in these smaller companies first. Companies like Microsoft and Wal-Mart began as small-cap, and as a result, the little people had the first stab at jumping on the bandwagon before the institutions and mutual fund giants stole the show and caused the prices to soar. The ideal scenario for the small investor is to buy shares in a company then sell their shares to institutions when they enter the scene as the company grows in value.

Another reason to purchase smaller-cap stocks is that earnings traditionally grow fastest among small companies. This is due to several reasons, one of which is that management generally holds a tight watch over the company. The people running the show have financial interest in the company’s success; therefore growth is a typical precipitate. While investing in smaller stocks is exciting, you should diversify your portfolio as much as possible. Investing in mutual funds or large-cap blue chips is always recommended to supplement smaller-cap investments.