Guest Author - Reshma Vyas
There are two types of stock; common and preferred. The category of common stock (often casually referred to in everyday conversation as "stocks") is generally the most familiar to the public. Common stock or "equities" represent ownership interest in a corporation. Investing in equity securities present varying levels of market risk, without any guarantee of profit or promise that investors will be able to recoup losses on their investment. One paramount aspect of common stock ownership is that the shareholders hold a residual claim (they are last in line to claim the assets of a corporation in the event of liquidation).
Categories Of Common Stock
Common stocks can fall into a wide range of categories. Depending on changing economic and business conditions, the classification of a particular stock can change. In some cases, classifications may overlap. Stocks that initially began as growth stocks can later become value stocks. A stock, for example, can have the varying characteristics of growth, value and income depending on a particular financial scenario.
The following is a brief description of the main types of stock classifications.
Blue-Chip Stock: At one time, blue was the color of a wagering chip of the highest value. Blue-chip stocks refer to companies of high quality with a long, historical track record of earnings, dividend payout and some measure of growth.
Cyclical Stock: These are stocks that are sensitive to business cycles and closely connected to changing economic conditions. Cyclical companies manufacture what are termed as durable goods. Examples of cyclical industries include automobile manufacturing, homebuilding, heavy machinery and tools and raw materials such as metals. However, other cyclical industries that are sensitive to business and economic cycles include hospitality and entertainment. Generally, cyclical stocks move higher during an upswing in the economic cycle and decline during economic downturns.
Defensive Stock: Stocks in this category refer to companies that manufacture products consumers need regardless of economic conditions (e.g., a sudden market downturn or inflationary pressures). However, they may lag the market during an economic upswing. Defensive companies manufacture nondurable consumer goods. Examples of defensive industries: beverages, food, household products and pharmaceuticals.
Growth Stock: Stocks of growth companies are considered to hold tremendous potential for capital appreciation. In theory at least, these particular stocks should be growing at a comparatively faster rate than the overall market or economy. A growth stock can sport an inordinately high price earnings ratio (PE). They certainly are not for the faint of heart as they can experience wild swings in terms of price. Growth stocks generally pay little or nothing in the way of a dividend as the companies prefer to reinvest earnings in order to finance future research, development and expansion. They can become overvalued or undervalued. In some cases, depending on the specific scenario, a growth stock could later transition to a value stock or be relegated as speculative.
Income Stock: Although income stocks can possess the characteristics of growth, however, in most cases, the heady periods of expansion by companies in this category have slowed. Income stocks can be loosely defined as that of "mature" companies. The companies in this category produce "reasonable" earnings and utilize a significant portion of their earnings in the form of a dividend payout.
Speculative: These stocks are exactly as termed, speculative. This category consists of a wide range of companies each with a unique set of circumstances and characteristics including risky, new ventures and even well-established companies that have fallen into distress and for various reasons are experiencing tremendous financial and business difficulties.
Value Stock: Stocks deemed as "value" stocks are generally those that are currently out of favor. They usually trade at lower prices in relation to their price-to-earnings or price-to-book value. Analysts will utilize a variety of "valuation" techniques to study the stock's fundamentals (e.g., balance sheet, dividends, earnings and sales). The stock is said to have an underlying value and it is believed that once market and business conditions improve, the stock will rise in value. In some cases, value and growth categories can overlap.
For informational purposes and not intended as advice and/or recommendation.