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When a company is first set up, its co-founders and, if there are, other investors are the first people to own shares of this business. Subsequently, they could be sold for immediate income and cash or kept as a long-term investment and for receiving a dividend. According to what an investor desires to achieve, there are several different types of stock to consider.
What are they, their characteristics and investment opportunities? Which one should you consider investing in? We will be dealing with the following types: income, cyclical, blue-chips, tech, defensive and growth stocks.
Different Types Of Stock
As its name suggests, this security generates a steady and stable income in the form of a dividend. Experts consider them to have a low level of volatility and offer a high dividend payout ratio. On the other hand, there are fewer opportunities to invest in. This type of stocks can be found in large and stable companies primarily in real estate, natural resources, and energy sectors.
For instance, we have company Z which has generated 10 million USD for a year. The board of directors decides that the dividend they will be paying to their shareholders is 1 USD per share. This dividend is paid out to investors regularly, which is part of their income. This is what makes this business an income stock.
This is an equity stock and it depends on the business cycles – ups and downs of a company due to an economic crisis or boom. Usually, these are companies offering products such as cars, houses, equipment – things that people purchase when times are bountiful and cut back on during periods of economic recession. Investors in cyclical stocks profit when they buy the stocks during a crisis (the price is at its lowest) and sell them during an economic boom when the price is high.
However, keep in mind that if there is a severe economic recession, these stocks might become worthless. Typically, car manufacturers are a good example of cyclical stocks.
People usually buy food every day, but they think twice when they want to acquire a new car. Generally, a person would purchase a new automobile during times of economic prosperity. But, if the country is in a recession, this person would certainly postpone this expense in the future, when the market recuperates.
These are stocks of large, financially stable companies that are usually one of the leaders in the respective industry. They have been on the market for a long time and their market cap is estimated to be billions. All this means that their shares’ price cannot grow substantially because it’s already high enough.
There are many examples in almost every sector, and as already mentioned these are one of the best performers. In the USA, these corporations are listed on the Dow Jones Industrial Average index. Because of their high market value, their growth rate is limited, therefore investors primarily profit from dividends.
Logically, these stocks belong to tech companies manufacturing different types of gadgets, devices, computers, equipment, etc. Some of these corporations, like Microsoft, are also blue-chips stock. Are they risky? Yes, definitely.
We all know how rapidly technology is changing. Basically, this happens on a daily basis. The new phone today is old tomorrow. The unpredictable results of technological research and the uncertain outcome of new products is a serious factor to think over.
Speculation is the key word here. These are corporations that have little to no earnings and are very volatile. However, they are potentially lucrative on account of their products, expansion on a new market or even managerial changes promising a brighter future. These stocks are extremely risky, which at the same time offers investors the chance of a very high return on their investment. Part of them is also called “penny stocks”, and very popular for day traders. As a rule, shares of such businesses are offered at a very low price, which is another thing that makes them attractive.
Companies dealing with online services and operating on the Net are some of the examples. They often boast of innovative solutions and products with extremely high market cap, but their real earnings are at a very low level. They have more of a symbolic capital rather than real money. Perhaps this stock category is more for gamblers than investors.
These are stocks that belong to corporations which are stable and solid performers and also resistant to the ups and downs of an economy. On the contrary, they can even make a profit during economic recessions.
For instance, during a financial crisis, most people cut back on their spending habits, but they cannot stop spending even if they wanted. While people avoid some expenses, they spend more on, usually cheaper, services and products.
Examples of such stocks are companies like Walmart which undercut the prices of other chain stores.
These are businesses which do not like to pay dividends to their shareholders. They would rather reinvest in their own company and projects than disburse dividends to investors. This practice guarantees higher profit and returns to the owners of a business. Is there any risk associated with this type of stocks? Yes, there is. If a company’s growth expectations are not as anticipated, eventually shareholders might lose money because the share prices will drop.
Having no dividends on your shares is another drawback associated with growth stocks. In a situation of a declining market, if an investor does not receive a dividend, the chances are high they would first sell their growth stocks. Logically, this will lead to declining share prices.
Overall, there is a wide range of business opportunities regarding investment in stocks. Just like investors, they have different features and profiles. If you are a steady income player, then income stocks are your choice. Do you like risks? Is gambling a second nature to you? Consider investing in speculative stocks.