DIFFERENT TYPES OF COMPANY STOCKS

Over the years, stocks have proved their worth and deserve a prominent place in any long-term investment plan, such as a retirement account. Since the year of 1926, stocks have beaten the performance of any other major asset class by a wide margin that has a return nearly 10% per year on average. Due to the fact that stocks by their nature are volatile, their value rises and falls to invest in them requires great cautions, thus, they should ideally be held to meet medium- and long-term goals. In other words, money invested in stocks should not be the money that you might need in three to five years. Nonetheless, stocks tend to deliver handsome returns in the long run, but volatile markets may not cooperate with your short-term cash needs.

 

1. GROWTH STOCKS

Growth stocks are the shares of companies with the potential to consistently generate above-average revenues and profit growth. These companies tend to reinvest most or all of their earnings in their businesses and pay out little or none of their profits to shareholders in the form of dividends. Owing to the fact that growth companies expand faster than the overall economy, hence, you can occasionally find these companies in mature industries. After all, keep in mind that even fast-growing companies are not necessarily good investments if their shares appear to be overvalued.

 

2. CYCLICAL STOCKS

Cyclical stocks are the shares of companies whose sales and earnings are highly sensitive to the ups and downs of the economy. When the economy is performing well, for instance, cyclical companies tend to shine. A contracting economy typically hammers the sales and profits of these companies and hurts their stocks. Whatever it is, cyclical industries include manufacturers of steel, automobiles and chemicals, airlines and homebuilders.

3. DEFENSIVE STOCKS

Defensive stocks describe the shares of companies whose sales of goods and services tend to hold up well even during the economic downturn. Some of the examples of industries that are substantially isolated from the business cycle are utilities, government contractors and producers of basic consumer products such as food, beverages and pharmaceuticals.

 

4. INCOME STOCKS

Income stocks typically pay out a relatively high ratio of their earnings in the form of dividends. The companies that issue them tend to be mature and have limited chances for reinvesting their profits into more attractive opportunities, for example, the utilities providers. In short, stocks that pay large dividends are usually less volatile because investors regularly receive cash dividends regardless of the market cycles.

5. SMALL-COMPANY STOCKS

Small company stocks have generated better returns over time than stocks of large companies. Although these companies tend to grow faster than their larger brethren, however, there is a trade-off - "small company stocks are much more volatile than the shares of big companies". Perhaps, there are a number of ways of defining what constitutes a small company. One common example or definition is that a small company is usually the one with a stock-market capitalization of $1 billion or less (if you have no clue what market capitalization is about, it is basically a company’s stock price multiplied by the number of shares outstanding).