Startups

• Some investors prefer to invest in startups on the premise that a new business based on a new technology or an innovative idea has the most upside potential. The most typical form of investing in startups is venture capital (VC). VC investing carries substantial risks: Many new VC-funded companies fail; only a handful succeed, but one could go on to become the next Microsoft or Google. Venture capitalists must be prepared to lock in their capital for several years, and they realize their profits only when a company is sold in an initial public offering (IPO) or to another company.
  
  

Earnings Growers

• Businesses that grow earnings faster than the rest offer the best investment opportunities because as they increase in size, so do investor stakes in them. Growth investment opportunities vary from company to company: Smaller entrepreneurial companies that bring new products and services to market grow faster but come with more downside risk; larger, more established companies grow slower but offer more stability. Most companies in this category are publicly traded. Nothing prevents an investor from investing in a privately held company, but the benefits of investing in a public company are the availability of audited financial information and liquidity -- the ability to convert shares into cash.
  
  

Cash Cows

• Profits from investing in startups and earnings growers come from capital appreciation -- stock price increases. Some businesses are not fast growers but have tremendous free cash flows -- that is, they generate large amounts of cash that they do not need to reinvest in the business. Investors can receive cash in the form of generous dividends or other distributions. Many companies in this category prefer to remain private because they do not need to raise capital (they have too much as it is), and staying private allows them to avoid cumbersome and expensive financial reporting.
  
  

Turnarounds

• Every now and then a once-great company runs into financial trouble because of mismanagement or adverse economic conditions, producing results well below its potential. Investors who correctly identify such companies can buy their stock at a substantial discount to the potential value and wait for the companies to turn themselves around. Private equity funds operate on this principle by buying whole companies cheaply, turning them around and reselling them at a profit a few years later.