Finance Terms Term Paper

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Corporate Finance

Defining the term "good company" on the terms of it recently experiencing rapid growth may be premature in realizing its worth as an investment. Rapid growth is a tricky idea and may lead many investors down the wrong path if they are unaware of the basics of stock valuation and determining what is right, prudent and wise. Although rapid growth may be an indicator of in fact a very good company to invest in, this criteria alone does not serve the successful investor in all cases.

Value is what is most important in this equation, as the risks involved in the market are unforgiving in those who ignore this idea in its entirety. Hough (2011) agreed with this idea when he wrote "Researchers have long studied the relationship between "value" and "growth" stocks.

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The difference mostly has to do with price. Value stocks are cheap relative to fundamental measures of value like earnings and the book value of assets. Growth stocks are pricey, because buyers expect fast growth in those measures. Long-term investing favors value stocks. The cheapest one-10th of U.S. stocks relative to projected earnings have outperformed the most expensive one-tenth by 9.1 percentage points a year on average since 1968, according to Brandes Investment Partners, a San Diego money manager." Smart investors need not be tempted by the quick fix and should remain to worthy principle that have been proven over time and effort.

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