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“Investors often pay a higher price for growth stocks and accept more price volatility as they...

“Investors often pay a higher price for growth stocks and accept more price volatility as they expect that these stocks will increase in value in the future”. Discuss with regards to investment in different types of funds. [Support your answer with examples in local and international markets] (20marks)

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Answer #1

Investors often pay a higher price for growth stocks and accept more price volatility as they expect that these stocks will increase in value in the future.

This statement is correct. Because when the investors do security analysis, they may foresee a high increase in the stock in future. That may be because of a certain event in the market. Such events may call for demand for certain products and thereby increase in their stock price. Then the investors will be ready to buy that stock expecting an increase in the stock price in future. The investors expects that the loss suffered by purchasing the stock for high price can be compensated in future when its price increase. Such an expectation is the driving factor for buying the stock at high price.

Example : Amazon's stock

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