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Corporate Americas' Genetic Growth

Many investment books will talk about how stocks and stock mutual funds are the superior investment over any other type of investment. This is by far evident given historical trends of the major U.S. markets. But if you're curious as to the "Why" then you might be in the right place.

First off, when you buy a stock, you are purchasing ownership rights to a company's profits. Unlike other investments like bond's which are, simply put, an IOU. Companies are genetically preprogrammed to grow, expand, and turn a profit. It is the general task of the board of directors and management to encourage this growth, which will hopefully lead to increased earnings. To be honest, I haven't heard of a company yet that has publicly said "we'd like to not grow in future years." Companies may not meet their goals or exceed benchmarks, however, the general point is growth.

When you buy stock in a company, you're buying a part of that company, and you have the opportunity to share in that companies growth. But companies need fuel to grow and they're preprogrammed to grow. One way companies do this is by retaining earnings. Some companies will share earnings in the form of a dividend, but also retain some percentage of earnings as well. Some companies will retain all earnings which is indicative of most technology stocks. An equation called ROE, which is return on equity, is the best indicator of a companies growth potential.

Most companies can sustain an average growth of 8% to 10% per year, but of course the top 5% of corporations are much higher. There is some maximum point of growth that a company can experience; this is why steady growth is the ultimate key.

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