Growth shares
Growth shares - are a special class of shares created (usually) by unlisted companies to provide equity incentives to management and key employees. Growth shares it is a selecting share with excellent growth prospects and benefit from the compounding effect as their earnings per share (EPS) increase year after year[1]. Growth shares (or secondary shares) highly regarded and with excellent growth potential. For example, many of the IT shares could be considered growth shares. These are shares with little earnings history but with strong future earnings potential[2].
A share is considered a growth share when it grows faster and at a higher level than the overall stock market. A growth share performs better than its peers in categories such as sales and earnings. Value shares are shares that are priced lower than the value of the company and its assets - you can identify a value share by analyzing the company's fundamentals and looking at the key financial ratios. Growth shares tend to have better prospects for growth for the immediate future(from one to four years), but value shares tend to have less risk and more steady growth over longer term[3].
There are hundreds if not thousands of shares on the market. In order to determine the probability of investment success, you can be guided by the following criteria[4]:
- Make the right comparison - Investor should measure the growth of a company against something to figure out whether it has a growth share.
- Checking out a company's fundamentals - word fundamentals in the world of share investment refers to the company safety financial condition and related data. When investors do fundamental analysis, they look at the company's fundamentals - it's balance sheet, income statement, cash flow, and other operational data. Main numbers investor should look at in case of growth shares are:
- Sales - it should be at least 10 percent higher than last year.
- Earnings - they should grow at the same rate as sales(or, hopefully, better)
- Debt - Is the company's total debt equal to or lower than the previous year?
- Looking for leaders and megatrends - a strong company in a growing industry is a common recipe for success. A megatrend is a major development that has huge implications for much of society for a long time to come. A good example is the advent of the Internet. For the growth investor, strategy becomes clear. Find companies with solid fundamentals that are well-positioned to benefit from these megatrends.
- Considering a company with strong niche - Companies that have established a strong niche are consistently profitable. Look for a company with one or more of the following characteristics:
- A strong brand - Companies such as Tesco with a strong and stable brand.
- High barriers to entry - United Parcel Service have set up tremendous distribution and delivery networks that competitors: can't easily duplicate.
- Research & Development (R&D) - Companies such as Pfizer spend a lot of money researching and developing new pharmaceutical: products.
Characteristics of investment in growth shares in brief[5]:
- Growth shares are an excellent investment area to focus upon and apply the Zulu Principle of becoming relatively expert.
- With the right selections, future capital gains, helped by the power of compounding, can be very substantial indeed.
- A 'margin of safety' can be established by buying growth shares with low PERS about their forecast EPS growth rates.
- Running profits, with rare exceptions, makes good sense and also a very tax-efficient policy.
- Very little time should be spent worrying about the market as a whole. Investment is the art of the specific and selection is far more important than timing.
- Alphabet Inc (GOOGL): Alphabet Inc. is a multinational conglomerate headquartered in Mountain View, California. It is the parent company of Google, YouTube, and many other subsidiaries. Alphabet Inc. offers Growth shares to its employees, which allow them to benefit from the company's stock appreciation and share in its success.
- Amazon.com (AMZN): Amazon.com is an American multinational technology company headquartered in Seattle, Washington. It is the world's largest online retailer and offers a variety of products and services, including Growth shares. Amazon.com's Growth shares are offered to employees to allow them to benefit from the company's success and share in its stock appreciation.
- Apple Inc (AAPL): Apple Inc. is an American multinational technology company headquartered in Cupertino, California. It is the world's largest information technology company and offers Growth shares to its employees, which allows them to benefit from the company's stock appreciation and share in its success.
Growth shares are a beneficial investment option for companies to provide equity incentives to management and key employees. Here are the advantages of growth shares:
- They have excellent growth prospects, allowing investors to benefit from the compounding effect as their earnings per share increase year after year.
- Growth shares provide a source of capital to companies, allowing them to finance their expansion and operations.
- They offer a form of employee remuneration that is performance-based, meaning that employees are rewarded for their contribution to the company’s success.
- Growth shares are usually free of any voting rights, meaning that the company’s founders have more control over decision-making.
- If the company is successful, the value of the growth shares will increase, providing investors with a potentially lucrative return on investment.
Growth shares can have many limitations, including:
- Lack of liquidity - Growth shares are usually illiquid, meaning that they are difficult to sell on the open market. This means that investors may have difficulty getting their money out of the stock, and also makes it hard to accurately assess the value of the shares.
- Volatile returns - Growth shares tend to be volatile, meaning that their values can fluctuate dramatically from day to day. This can make them a risky investment, as an investor may see their investments rise or fall in value quickly, without any guarantee of a positive return.
- Limited information - Growth shares often have limited information available, making them harder to assess than their listed counterparts. This can make it difficult to make an informed decision on whether or not to invest in them.
- Expensive fees - Growth shares can also be expensive to buy, as they often require higher fees than more traditional investments. This can make them an expensive option, and can reduce the potential returns that investors may receive.
- Equity-based Incentives - Equity-based incentive plans are used to reward employees for their hard work and dedication by providing them with a stake in the company’s success. Equity-based plans provide employees with an ownership stake in the company, which can be beneficial for them if the company is successful.
- Stock Options - Stock options are a form of compensation given to employees that give them the right to purchase company stock, typically at a discounted price. This can be beneficial for employees as the company’s stock value increases, as they can then sell their stock for a profit.
- Performance-based Bonuses - Performance-based bonuses are a form of compensation given to employees based on their performance. Bonuses can be given in the form of cash, stock, or other forms of equity. This type of compensation can be beneficial for both the employee and the company, as it rewards employees for their hard work and dedication, while also incentivizing them to continue to strive for excellence.
In summary, growth shares are a form of equity incentive to reward and motivate employees, but there are other approaches such as equity-based incentives, stock options, and performance-based bonuses that can be used to provide employees with an ownership stake in the company, reward them for their hard work and dedication, and incentivize them to continue to strive for excellence.
| Growth shares — recommended articles |
| Equity Participation — Blue chip — Optimal capital structure — Performance shares — Blind Pool — Book-to-Market Ratio — Capital rationing — Tax preference theory — Core Deposits |
References
- Hirsch B., (2005), Bryan Hirsch's Guide to Personal Finance, New Africa Books
- Kassam I, Mladjenovic P., (2010), Investing in Shares For Dummies, John Wiley & Sons
- Slater J., (2010), Beyond the Zulu Principle: Extraordinary Profits from Growth Shares, Harriman House Limited
- Varvouzou I. (2013), Capital Market Anomalies: Explained by human ́s irrationality, Anchor Academic Publishing (aap_verlag)
Footnotes
Author: Klaudia Kazienko
