In this tutorial, 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 name may come from the size of the company that issued it, or it may be named for its investment objective. You will be introduced to a number of stock types in this tutorial:
BLUE CHIP STOCKS
The 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 STOCKS
Penny stocks are low-priced,
speculative stocks that are very risky. They are issued by companies
with a short or erratic history of revenues and earnings. They are
the lowest of the low in price and many stock exchanges choose not
trade them.
Penny stocks (also called designated securities) have these specific
qualities: they sell for less than $5, they are sold over the counter
(but not on the NASDAQ), and their companies have 2 million dollars
or less in net tangible assets. They are listed daily on the Pink
Sheets.
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.
These stocks are popular among small speculators.
INCOME STOCKS
Income 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 stock.
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. Income
stocks can actually be more profitable than bonds. To maximize income,
some investors will even seek out companies that frequently raise
their dividends and are not saddled with debt.
VALUE STOCKS
A 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...it is a 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 STOCKS
These are also worth noting.
Defensive 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 stock is stock that has been bought back by the company that issued it. 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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