Here are 5 rules that you should know about growth stock investing.
1) The bottom will fall out of your stock – All stocks will at some point top. Many beginners to growth stock investing think that if their stock is cruising up and making them money, then their stock is not subject to a top. However, the majority of stocks DO top, and once a leading stock tops, its average fall is around 70%. When stocks go down, they tend to REALLY go down, and big earnings can be wiped out fast. Many great companies, with good earnings growth have dropped due to the stock being over owned. With the stock advancing well, a large number of mutual and hedge funds buy into it, and no matter how well the stock is doing, there comes a point in which some of these funds make the decision to sell, and this leads to the drop.
Too many investors find it hard to sell a winning stock, as they hope that the growth will continue and more money will be made. The wise investor, however, does not get trapped in such thoughts, and does not have difficulties with selling growing stock. Investing in growth stocks can lead to major disappointment.
2) Trends are vital – You need to learn to recognize the major market trend, and be aware of how important that trend is. Right now, the massive downtrend that we have witnessed looks dead and buried, whilst the uptrend has yet to fully establish itself.
3) Do not focus on the economic news – The stock market looks at least 6 months ahead, so today’s news is completely irrelevant. If you invest according to what is going on in the news, then you will be way behind the professionals. This puts you at a major disadvantage. To become a great investor, you need to get your information from the sources that are looking at what will be, and not what is. The best prospects are younger and not well-known companies with great potential.
4) Fast growing companies are the way forward – Even if a company has fully established itself, has strong competition and so on, fast growth can overcome this, and can attract institutional investors who push prices higher as they buy in. Small companies who are achieving an organic percentage growth rate of 3 figures are naturally a great bet.
5) Keep a loss limit and do not compromise it – Many investors have a limit of 20%, and do not tolerate any losses which exceed this limit. If a stock has dropped this far, let it go immediately. This is a much better strategy than letting it fall further and further, even if you might miss out on a rebound. If your possible losses are limited, you are in a good position as an investor.
For more information on investing in growth stocks, go to: en.wikipedia.org
