First it’s important to understand what a stock is. When investors talk about stocks, they usually mean common” stocks. A share of common stock represents a share of ownership in the company that issues it. The price of the stock goes up and down, depending on how the company performs and how investors think the company will perform in the future. The stock may or may not pay dividends, which usually come from profits. If profits fall, dividend payments may be cut or eliminated.
Many companies also issue “preferred” stock. Like common stock, it is a share of ownership. The difference is preferred stockholders get first dibs on dividends in good times and on assets if the company goes broke and has to liquidate. Theoretically, the price of preferred stock can rise or fall along with the common. In reality it doesn’t move nearly as much because preferred investors are interested mainly in the dividends, which are fixed when the stock is issued. For this reason, preferred stock is more comparable to a bond than to a share of common stock.
It’s hard to think of a compelling reason to buy preferred stocks. They generally pay a slightly lower yield than the same company’s bonds and are no safer. Their potential equity kicker (the chance that the preferred will rise in price along with the common stock) has been largely illusory. Preferred stock is really better suited for corporate portfolios because a corporation doesn’t have to pay federal income tax on most of the dividends it receives from another corporation.
There are lots of reasons to own stocks and there are several different categories of stocks to fit your goals.
GROWTH STOCKS have good prospects for growing faster than the economy or the stock market in general and in general are average to above average risk. Investors buy them because of their good record of earnings growth and the expectation that they will continue generating capital gains over the long term.
BLUE-CHIP STOCKS won’t be found on an official “Blue Chip Stock” list. Blue-chip stocks are generally industry-leading companies with top-shelf financial credentials. They tend to pay decent, steadily rising dividends, generate some growth, offer safety and reliability. And are low-to-moderate risk. These stocks can form your retirement portfolio’s core holdings—a grouping of stocks you plan to hold “forever,” while adding other investments to your portfolio.
INCOME STOCKS pay out a much larger portion of their profits (often 50% to 80%) in the form of quarterly dividends than do other stocks. These tend to be more mature, slower-growth companies, and the dividends paid to investors make these shares generally less risky to own than shares of growth or small-company stocks. Though share prices of income stocks aren’t expected to grow rapidly, the dividend acts as a kind of cushion beneath the share price. Even if the market in general falls, income stocks are usually less affected because investors will still receive the dividend.
CYCLICAL STOCKS are called that because their fortunes tend to rise and fall with those of the economy at large, prospering when the business cycle is on the upswing, suffering in recessions. Automobile manufacturers are a prime example, which illustrates the important fact that these categories often overlap. Other industries whose profits are sensitive to the business cycle include airlines, steel, chemicals and businesses dependent on home building.
DEFENSIVE STOCKS are theoretically insulated from the business cycle (and therefore lower in risk) because people go right on buying their products and services in bad times as well as good. Utility companies fit here (another overlap), as do companies that sell food, beverages and drugs.
VALUE STOCKS earn the name when they are considered under priced according to several measure es of value described later in this booklet. A stock with an unusually low price in relation to the company’s earnings may be dubbed a “value stock” if it exhibits other signs of good health. Risk here can vary greatly.
SPECULATIVE STOCKS may be unproven young dot-coms or erratic or down-at-the-heels old companies exhibiting some sort of spark, such as the promise of an imminent technological breakthrough or a brilliant new chief executive. Buyers of speculative stocks have hopes of making big profits. Most speculative stocks don’t do well in the long run, so it takes big gains in a few to offset your losses in the many. Risk here, no surprise, is high
Article Courtesy :
The Basics for Investing in Stocks (Book)