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Types of StocksIntroductionIn this section, we will explore what is meant by the many names given to stocks and the corporations that issue them. Each of the following types refers to any of several different qualities of stocks or companies. For example, a stock's classification may come from the size of the company that issued it, or from the perceived investment objective it fulfills. You will be introduced to the following stock types in this section:
Blue-Chip StocksThe term "blue-chip" comes from poker, where the blue chips carry the highest value. Large, established firms with a long record of profit growth, dividend payout and a reputation for quality management, products and services are referred to as blue-chip companies. These firms are generally leaders in their industries and are considered likely candidates for long-term growth. Because blue-chip companies are held in such high esteem, they often set the standards by which other companies in their fields are measured. Well-known blue-chips include IBM, Coca-Cola, General Electric and McDonald's. Blue-chip stocks are included in the Dow Jones Industrial Average, an index comprised of 30 companies that are all major players in their respective industries. Popular among individual and institutional investors alike, the 30 stocks listed on the Dow account for about one fifth of the total market value (over $8 trillion) of all U.S. stocks. Investors who seek investments that pay moderate dividend yields and that also grow are attracted to blue-chip stocks. These stocks are usually priced high because of their demand, have relatively low volatility and deliver a steady stream of dividends. The main downside is that, since they are so large, they have little room to appreciate, compared to smaller, up-and-coming stocks.
Penny StocksPenny stocks, over-the-counter bulletin board (OTCBB) or pink sheet securities are low-priced, speculative stocks that are very risky and are not suitable for every investor. They are issued by companies with a short or erratic history of revenues and earnings. Penny stocks sell for less than $5 per share and their companies have under $2 million in net tangible assets. Therefore, the companies do not qualify to trade on the New York Stock Exchange or on the Nasdaq. Instead, the securities are traded by specially registered Dealers. Quotes for the securities are frequently outdated or delayed and may not be firm. Trades for these securities are always executed on a manual basis. The appeal of penny stocks comes from their low price. Though the odds are against it, if the company that issued them suddenly finds itself on a growth track, their share price can rise rapidly. Investors who trade these securities are speculating as to the company's growth and are willing to assume the entire loss of their investment.
Income StocksIncome stocks are those stocks that pay higher-than-average dividends over a sustained period. These above average dividends tend to be paid by large, established companies with stable earnings. Utilities and telephone company stocks are often classified as income stocks. Income stocks are popular with investors who want steady income for a long time and who do not need much growth in their stock's value (though some growth does occur). In this sense, investors who choose them have something in common with bondholders. To maximize income, some investors will even seek out companies that frequently raise their dividends and are not saddled with debt.
Value StocksA value stock is a stock that is currently selling at a low price. Companies that have good earnings and growth potential but whose stock prices do not reflect this are considered value companies. Both the market and investors are largely ignoring their stocks. Investors who buy value stocks believe that these stocks are only temporarily out of favor and will soon experience great growth. Factors such as new management, a new product or operations that are more efficient may make a value stock grow quickly. Many companies alternate between value and growth as part of the business cycle. Value stocks are attractive to investors who watch markets carefully for undervalued stocks they feel will move upward.
Other Types of StocksDefensive stocks are those whose prices stay stable when the market declines and are issued by industries that naturally do well during recessions. Food and utilities companies are defensive stocks. Debt collection companies also tend to perform well when the market turns sour. Cyclical stocks are stocks that move up or down in sync with the business cycle. Examples include the housing industry and industrial equipment companies, because these companies serve the needs of growing economies. Investors who do not mind buying and selling as the market fluctuates tend to like cyclical stocks. Individuals who prefer to hold a stock for a long time may not like them unless they can weather ups and downs in the stock's value. Gold stocks are the stocks of gold-mining companies. Their value moves up or down with the price of gold. Treasury stocks are stocks that have been bought back by the company that issued them. Companies may buy their stock back from investors when they believe it is underpriced on the market. The company can then set aside the stock for future uses such as debt payment or the awarding of stock options.
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