Understanding Growth and Income Invesments

A growth investor focuses more of his attention on the future prospects of a company. Unlike value investors, he can buy into a company that is trading above its fair value, but has the potentials for growth. These companies grow faster than others in their category, this is where the growth investor focuses while investing, and not on the current book value. Young companies fall under this umbrella. Their argument is that as the company is growing in revenues, it will directly translate into the growth of the share price of the stocks. Here, profits are made through capital appreciation and not through dividends, as nearly all the money they realize for the year or quarter are invested back into the company. They do not pay dividends.

On the other hand, income investing means picking a straight forward company stocks that provides steady stream of income for the investor. Most of the times, when investors are talking of steady income; they are referring to some fixed income that comes in the form of bonds, but it should not be limited to bonds securities alone. High dividend paying stocks can equally provide a solid source of steady income. So, income investing means looking for and finding those categories of companies to invest in. On most occasions, Old and advanced companies falls under this category. These are companies that have reached certain level of growth, and can be said to be at the peak of its career and are no longer able to contain some levels of growth again. These companies are no longer in the rapidly growing or expanding industries. So at the end of the quarter or year, they retain their profits to themselves, and instead of re-investing these proceeds, they pay them out as dividends or bonus. This is a way of paying back to their investors who has been standing by them.

So, while growth investors are more concerned about the future potentials of a particular company, the income investor is more interested about what he gets now. Every investor has a way to gauge the value of a company before investing (be it growth or income investor), whatever method you use must be applied with a particular company's situation in mind. An average company with 2-3% yield of invested capital could be considered okay for income investors, but for growth investors, it is unacceptable. They are looking at 5-6% of their invested capital.

So as a discerning investor, before you stake your money, decide on your investment goal .After taking a decision on which investment pattern to follow, select a formula which will serve as the frame work for your selection analysis. Be sure that you have the particular situation of the particular company you want to invest in mind for your formula to work. More importantly, consider and compare the past performances of the company in relation to the industry where it plays. The application of these guiding principles may differ from company to company and from industry to industry. But a judicious use of any these of these principles will add value to your investments. Or what do you say?

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