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Organic growth is a specific kind of growth process within a company. Companies that offer public stock investment opportunities are often called growth stocks while they are in a process of active organic growth, and value stocks when their growth begins to slow. Organic growth is a traditional reason for buying stock in a company.
Organic growth specifically excludes other kinds of “inorganic growth” including mergers and acquisitions. Generally, organic growth is the internal growth of a company due to more product sales and better saturation of a market. It is what the core of a business does to increase profitability, rather than how businesses expand through acquiring other companies.
Organic patterns for growth may be a part of technical analysis, where analysts look at where companies are headed. Some financial professionals may feel that organic growth is better for a company. Others believe that inorganic growth offers specific opportunities for making a growth rate higher.
In the argument for organic types of corporate growth, finance pros might talk about the solid value of increasing a customer base for a core business. They may also point out specific problems with inorganic growth, such as confusion when mergers and acquisitions take place across national boundaries, and international law makes it harder to administer a diversified business. Proponents of organic growth also talk about the value of transparency in a stock, where it’s easier for investors to figure out where they stand with the purchase of equity in a company.
Those experts who argue for inorganic growth might talk about how mergers and acquisitions present opportunities to broaden and grow a business. Some of them will point out that the merger process helps growth-limited companies to align themselves with others that are capitalizing on new technologies or innovations. In some market eras, the appeal of inorganic growth has led to flurries of mergers and acquisitions that have brought mixed results for various companies.
In talking about organic or inorganic growth, analysts might refer to a critical mass where a business rapidly becomes more profitable. Looking at organic growth on its own is one way to really assess the value of a company or business. Investors have to make these kinds of observations to effectively guide their decisions about buying into companies listed on major stock exchanges.