Methodology

What are the stages of firm development?

Stocks

Module 2

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Development Stages

Development Stages

Related to company size, the development stage of a firm is another key characteristic that has an impact on the performance of a stock. There are 4 stages of development: Startup, Growth, Maturity and Decline.  All successful companies go through each development stage, with it being the life cycle of a business.

 

The startup phase involves developing the operations of the business, the growth phase involves scaling the business, the maturity phase involves establishing the business as a well known brand and the decline phase involves the end of the business. 

 

Most companies that are listed on the stock market tend to be in either the growth, maturity or decline phase. Startup companies usually raise money through private investors, such as angel investors or venture capital firms, and are not listed on the stock market.

 

Similar to company size, the earlier that a company is in its development (and therefore smaller), the more risky it usually is. The less developed a company is, the larger and more inconsistent the potential returns are.

The Startup and Growth Phases

Startup companies are the riskiest type of company, as they are new, do not have a track record and have a high probability of failure. As stated, it is usually not possible to invest in startup companies as they are not commonly listed on the stock market. Nonetheless, if an investor is able to buy stock in a startup company, then they can expect a bumpy ride – the investment has a small chance of becoming very valuable, with an even greater chance of it becoming worthless. For that reason, startup companies are very, very high-risk investments and are not really suitable for less wealthy, inexperienced investors.

 

Growth companies are companies that are more established than startup companies. They have commonly listed on the stock market and have the intention of raising more money to further establish the company. As investments on the stock market go, growth stocks are on the more risky side. Examples would include Tesla, Zoom and Shopify. Growth companies are known to take large risks inside of the company, aiming to grow the size of the company significantly. By taking such risks, the size of the company can grow very quickly, while also being able to shrink very quickly too. Growth stocks would be suitable for an adventurous investor that wants to take on larger risks to grow their own wealth at a quicker rate. As stated though, this could backfire and result in the decline their wealth instead.

The Maturity and Decline Phases

Mature companies tend to be established companies that have been listed on the stock market for a significant amount of time. Mature companies usually have less opportunities to grow, which means that their stock price increases at a slower, more stable rate. Examples of mature companies would be IBM, Walmart and Johnson & Johnson. Mature stocks are suitable for most investors in the stock market as they are the most stable and consistent. By investing in mature stocks, an investor can grow their wealth in a slow but steady way. 

 

Decline phase companies are those that are coming to the end of their business life. They are usually companies that have no opportunities to grow, with outdated products that nobody needs anymore. Mature companies can be pushed into the decline phase if they do not keep up with trends or offer products that meet modern requirements. For instance, the emergence of websites like Netflix or YouTube pushed Blockbuster into the decline phase, with fewer and fewer people needing to rent movies from a physical store.

 

Ensuring that the companies that you invest in remain innovative is important so that you are able to avoid losing money on them if they enter the decline phase.

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