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.
David Gass is President of Business Credit Services, Inc., founder of http://www.SmallBusinessConsulting.com
and co-developer of the Corporate Manager Software which manages the
records of a Corporation or LLC. For a Free Trial of the software visit
http://www.corporateforms.net
