| Types of Stocks |
|
Income Stocks. Income stocks are those with a long and sustained record : paying high dividends. Generally, a company whose common stock falls to this category is in a fairly stable and mature industry (e.g., an electric utility company). These companies normally pay out a relatively high percentage of corporate earnings as dividends to common stockholders. Because these companies distribute (rather than reinvest) their earnings, their stocks are less likely to experience substantial capital appreciation. They : also more likely to be sensitive to interest rate fluctuations. Income stocks are particularly popular with people who need current cash flow from their stock investments.
Growth Stocks. Growth stocks are stocks that are expected to experience high rates of growth in operations and/or earnings. These growth rates are usually substantially higher than the market averages. To support their high growth rates, these companies generally reinvest their earnings instead of distributing them as dividends. Growth stocks are generally much riskier than income stocks. The price of growth stocks tends to rise faster than that of other stocks, and their total return tends to be greater than that of income stocks. On the other hand, growth stocks are also more likely to suffer price decline larger than the average stock in a bear market. Stocks of companies in new and rapidly expanding industries—computers, engineering and other high-technology industries—are frequently considered growth stocks. Value Stocks. These are stocks of companies which are considered undervalued because they may be in an industry that is out of favor, they may be experiencing management turmoil, or they may be restructuring their business operations. These stocks tend to have lower price/earnings and price to book ratios than growth stocks do. Therefore, their prices are cheap com¬pared to the prices required to be paid for growth stocks. Cyclical. Cyclical stocks are stocks of companies whose earnings tend to follow the business cycle. Highly cyclical industries include oil and other natural resources, steel, and housing. Cyclical stocks are often more risky than stocks in companies less subject to changes in the business cycle. If you choose to invest in cyclical stocks, your objective is to purchase these stocks when you envision an economic upturn and sell them before an economic downturn.
Defensive Stocks. Defensive stocks are stocks that are, in a sense, counter¬cyclical. Prices of these stocks tend to remain stable or perhaps rise during periods of economic downturn, while showing poorer results (in comparison to other stocks) during periods of economic upturn. Investors frequently use defensive stocks to balance their investment portfolio. Defensive stocks are well-established companies producing goods that are generally still in demand during an economic downturn, such as food, beverages, and pharmaceuticals. Blue Chip Stocks. The stocks of the companies with the highest overall quality are those considered to be "blue chips." The companies with blue chip common stocks are often financially stable companies with steady dividend-paying records during both good and bad years. They are usually the leaders within their industry or industry segment. Blue chip stocks include all of the Dow Jones 30 industrial companies, some utilities, and the stocks of other large and successful companies. Because of the blue chips' high level of quality and relative stability, many investors find them attractive long-term investments.
Source:
|
