Type of Stock By: NoorulhadiLecturer GCMS Peshawar
• There are many different types of stocks available and in order to meet your financial goals, its important that you understand the differences between them.
Blue Chip Stocks• Blue chip stocks are well-established, nationally known, and generally financially sound companies. Blue chip companies have consistently demonstrated good earnings and industry leadership. Blue chips are typically less volatile than other stocks and have a record of paying dividends in both good and bad times.
Growth StocksGrowth-stock companies have earnings and market share expansion that exceeds the industry average and the economy in general. Growth stock companies typically reinvest their profits to expand and strengthen their businesses, retaining most of their earnings to finance expansion and paying little, if any, dividends to shareholders. Investors are attracted to these stocks because they expect the stock price to go up as the company grows.
Penny Stocks• The term penny stock generally refers to low-priced (below $5) stock, which is traded over the counter (OTC). Penny stocks are generally considered a very high-risk investment.
Value Stocks• Value stocks are those that are considered undervalued by value investors. Value investors typically define undervalued stocks by their book/market and price/earnings ratios. Often value stocks represent companies with past financial difficulties, whose potential for growth has been underestimated, or that are part of an industry that is currently out of favor with investors.
Defensive Stocks• These are stocks of companies that provide necessary services, such as utilities that provide electric and gas, supermarkets that provide food, etc. Because the companies representing these stocks fulfill basic human needs, these stocks tend to provide a degree of stability for investors during recessions or economic slowdowns.
Income StocksIncome stocks typically pay highdividends in relation to their marketprice, making them attractive topeople who buy stocks for currentincome. Historically, these have beenpublic utilities, but some blue chipstocks may fall into this category aswell.
Cyclical StocksCyclical stocks represent companies whoseearnings are closely tied to the businesscycle. When business conditions are good, acyclical company generally prospers and itscommon stock price generally rises. Whenthe economy slows or falls into recession,these companies earnings and stock pricestypically fall. Airlines, automobiles, furnituremanufacturers, steel and paper producersare examples of cyclical stocks.
Seasonal StocksThe performance of these stocksfluctuates with the seasons. Forexample, retail companies salesand profits often increase atChristmas and the start of theschool year.
International StocksMany investors use domestic (U.S.-based) equities as an integral part oftheir investment portfolios. However,the U.S. equity markets representonly about one-third of the total worldmarkets. To be truly diversified, youshould consider international equityinvestments.