What’s a growing firm?

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Investing in growing companies can be attractive as they reinvest most profits and have the potential for stock prices to rise. However, investing in a booming industry can create a bubble. Mature companies tend to have a steady growth rate and may pay dividends. Financial publications provide information for investors.

A growing company is a company with profits that are increasing at a faster rate than the overall economy. Such companies are rapidly accelerating their profit rate and tend to reinvest most of their profits, in contrast to paying dividends to shareholders. Eventually, such companies level off and begin to experience more regular rates of profit, growing slowly and steadily over time.

Investing in a growing company is often seen as attractive. Stock prices generally rise steadily along with company earnings, and people may try to buy shares early on to position themselves for profit when stock prices rise. Investing at the new and growing company level can position people well for the future and can be an important component of some investment portfolios. There are several mutual funds based on investing in groups of growth companies for investors who prefer this option.

Some industries are growth industries, with an overall rate of growth that outpaces the overall economy. Within a growth industry, a growth company is a company that is growing even faster than the rest of the industry, plus the economy. Such companies are positioned to become leaders in the field and may face fierce competition from rivals interested in furthering their own growth. Investing in growth companies and industries can sometimes create a bubble, something investors should keep in mind when considering a potential investment in a growth company within a booming industry.

The most mature companies and industries tend to have a quiet growth rate. After a period of rapid expansion made possible by innovation, the identification of new market share areas, and aggressive business tactics, growth is trending to slow at a more steady pace. Such companies may start paying dividends instead of reinvesting their profits because they are large and stable enough that they do not need to sink their profits into expanding research and development and repaying loans. For investors who held onto their shares throughout the growth period, the mature company can become a regular source of dividend income.

Financial publications generally provide information on growing companies, including their history and projections for their future. Investors and analysts can use this information to make decisions about whether to invest in a growing company and when to sell shares to take advantage of increases in value before the share price begins to level off.

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