Choosing a stock while taking an investment decision depends upon your financial goals. Corporations issue different types of stocks, the basic two types being common stock and preferred stock. Another type of classification which is commonly used is to classify stocks as growth, value or blue chip stocks, amongst others. It is important to understand the various terms clearly so that you can make a wise investment decision. Common Stock This is the basic stock issued by a corporation and represents the fraction of the company owned by you. Common stockholders bear the most risks associated with the company. Common stockholders get dividends only after preferred stockholders have got theirs. However, the investors holding common stocks have voting rights in the company, which enable them to influence corporate resolutions. Preferred stock holders do not have voting rights. Preferred Stock This is a form of equity, but has the characteristics of both bonds and common stock. As the name implies, preferred stock holders can claim the earnings and also the assets in the event of liquidation of the company, prior to common stock holders. However, the claims of preferred stock holders come after those of bondholders. Additional Classifications Growth Stocks. Growth stocks are stocks of companies whose financial performance and earnings exceed the industry average and the economy in general. The profits are typically re-invested to expand the business and minimal dividends if any, are paid to stockholders. Stockholders gain because the share price goes up as the company grows. Value Stocks: These are stocks considered undervalued by investors. Typically, these may be stocks of companies going through a rough patch or whose growth potential has been underestimated by the market. These stocks attract those investors, who believe in long-term growth of the company. The second richest man in the world and great investor, Warren Buffet, has championed the art of value investing. Blue Chip Stocks: Blue Chip stocks are stocks of financially sound, well- established companies with managements having a well established track record of delivering earnings. Their stock price movements are less volatile and they pay regular dividends. Such companies have industry leadership. Defensive Stocks: These stocks provide stability in stock price during periods of recession, economic slowdowns or slow down in industries. Consumers continue to buy food, medicines, gas and electricity even during slowdowns and stocks of companies dealing with these sorts of goods do not lose much value during rough patches in the economy. Cyclical Stocks: Cyclical stocks are stocks of companies which perform along with business cycles. When the business cycle is in an upturn, the value of the stocks of companies related to the particular industry would appreciate rapidly, offering windfall gains. Commodities, airlines, durable goods manufacturers fall in this category. However, these stocks lose value during downturn in business cycles. Income Stocks: These are especially suited for investors looking for a greater proportion of current income of companies. Income stocks offer a higher dividend in relation to their market price. Blue-chip companies and utilities like banks fall in this category. Seasonal Stocks: Stocks of such companies fluctuate with seasons. Examples are stocks of retail companies, greeting card companies which have a greater proportion of sales during festive seasons. Penny Stocks: These are low value stocks, typically with a value in the range of $1 to $5 per share and are traded Over-The-Counter (OTC). They are highly speculative and high risk investments. A thorough understanding of different types of stocks and the characteristics of each are very essential so that you can make informed decisions, and preserve or witness appreciation in the value of your costs. |
