Stocks: Different categories of Stock
There are many categories of stocks, some more
riskier than others. Here is some of the categories:
-
Growth Stocks - These have good prospects for growing
faster than the economy or the stock market in general. Investors buy them
because of their good record of earnings growth and the expectation that they
will continue generating capital gains over the long haul. Most growth stocks
either pay very little or no dividends because management reinvests earnings to
feed the growth and have high stock prices relative to their current earnings or
asset (high P/E ratios or high price-to-book ratios).
A good example of a growth stock is online auction site EBAY.
-
Value Stocks - High quality
companies that are out of favor with the market. These companies are opposite of
growth stocks in that, they have low P/E ratios, price-to-book ratios and high
dividend yields.
- Blue Chip Stocks - Companies
known nationally for the quality of its products or services, its reliability,
and its ability to operate profitably in good and bad economic times. These
stocks can sometimes be classified as growth stocks such as Coca-Cola and
American Express. Investors with little tolerance for risk buy these stocks for
their reliability and high quality earnings. They tend to generate decent
dividend income with some growth. Since provide a combination of growth and
income, some blue chip stocks can also be considered Growth and income stocks.
- Income Stocks - These companies
pay high current income in the form of dividends and raise them regularly.
Electric utilities and banks often fall into this category. As you can imagine,
many investors in this type of stocks are retirees and others in need of high
current income from stocks. The dividend yield on Real Estate Investment Trust (REITs)
are also very generous since REITs are required to distribute as much as 90% of
their income.
- Growth and Income stocks -
Companies that provide a combination of growth and income. These are
well-established companies that pay regular dividends and increase in value at a
regular, if modest, rate. Very similar to blue chip stocks.
- Cyclical Stocks - Cyclical
stocks tend to rise in value during an upturn in the economy and fall during a
downturn. They usually include stocks in industries that flourish in good times,
including airlines, automobiles, steel, chemicals, travel and leisure, and any
business dependent on home building.
- Defensive Stocks - In contrast
to cyclical stocks, stocks in industries that provide necessities such as food,
electricity, gas, and health care products, or those that provide services that
reduce the expenses of other companies, tend to be more price-stable. These
stocks are also sometimes called countercyclicals.
- Speculative Stocks - Internet
and high-tech stocks are litter with these. Why? because these are young
companies in a fast growing area with profits for the companies were
acknowledged to be years away. Buyers of speculative stocks have hopes of making
a killing (make a lot of money) in a short-term. Most of these stocks don't do
well in the long run, so it takes big gains in a few to offset your losses in
the many.
One type of stock might in time
become another type. For instance a speculative mining stock could
become a blue chip if after time it finds a commercial mine and mines
it regularly over time.
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What
are Penny Stocks?
Stocks that trade for
less than $1 a share are often described as penny stocks. Penny
stocks change hands over the counter (OTC) and tend to be
extremely volatile. Their prices may spike up one day and drop
dramatically the next, reflecting the unsettled nature of the
companies that issue them and the relatively small number of
shares in the market place.
While some penny stocks
may produce big returns over the long term, many turn out to be
worthless. Institutional investors tend to avoid penny stocks, and
brokerage firms typically warn individual investors of the risks
involved before handling transactions in these stocks. However,
penny stocks are sometimes marketed aggressively to unsuspecting
investors..
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Next-->>
How and where do Stocks trade?
I can give you a six-word
formula for success:
Think things through -- then follow through.
-- Eddie Rickenbacker
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