Stocks are the most interesting, lucrative and equally risky form of investment. Investors buy shares expecting good returns. Many people like Warren Buffett have made billions only through trading, while many have had the bitter experience of investing in stocks. Thus a careful understanding of stocks is essential before going into the market as there are many different types of stocks which have their own advantages and disadvantages as well.
An income stock is an equity security that offers a higher yield than would arise from the majority of the security’s overall return. It is a very popular type of stock among investors as it is the least volatile of all and offers its investors a higher dividend yield than the market.
Income stocks are typically issued by large and well-established organizations that have an impressive track record of managing their business operations and finances. Moreover, whenever a large organization makes some profit, most of it goes to the investors instead of reinvesting in the company. This is the reason why many income stocks are considered ‘blue chip’ stocks as it provides a consistent, fairly reliable and handsome dividend to the investors.
Income stock can be found in any industry but most (most of the time) is available in natural resources, food, such as real estate, the energy sector, utilities, financial institutions and traditionally stable sectors.
People who do not have regular source of income and want to earn money with less risk, they often find attractiveness in this type of stock. Older people or retirees are one such category who invest heavily in income generating stocks. An ideal income stock has very low volatility, dividends exceeding prevailing 10-year Treasury bond rates with modest levels of annual profit growth.
Penny stocks are usually issued by small companies especially start-ups to raise money from investors. This type of stock is usually illiquid, traded at very low prices, and is issued by companies that have a very low market capitalization.
In the Indian trading market, penny stocks usually trade below the price of Rs. 10 And in Western markets, such shares are usually traded below $1 most of the time. Many consider a stock priced under $5 to be a penny stock. The advantage of investing in penny stocks is that it is available at a low cost and has the potential to convert a ‘small investment’ into a ‘luck’. For example, if you buy 50,000 shares of a penny stock at $1 each, a $1 increase in the share price could earn you $50,000 in a limited amount of time. However, as people say that with every good thing there is some risk, there is also another side to it. Penny stock is considered risky because it comes from companies that have a small number of shareholders, and disclose very limited information about their businesses. Furthermore, these types of stocks are more prone to price manipulation and scams and most of the time do not make money for investors.
Stocks issued by companies that are developing new products, looking to tap unexplored areas (often foreign markets), or have made major changes to their management or financial position, are considered speculative stocks. Such stocks usually carry high risk as the company, product and management and are often not successful in the long run but if such companies are successful then the return on investment can also be very high. It promises high returns but the risk is also high.
In growth stocks, whenever a company makes a profit, money is reinvested in the company to fuel its innovation and business expansion. In this type of stock, investors do not get any dividend, but they get a capital gain whenever they sell their shares. As the company grows, share prices also rise and the investor receives more capital gains, but when the reverse happens, the customers suffer as well. Typically, loyal customers who trust a company, its product and management tend to invest their money in these types of stocks over a long period of time. Both small and large enterprises issue growth stock.
Stocks of companies that offer luxury and discretionary goods and services are often considered cyclical stocks.
Airlines, automakers, hotels, restaurants and clothing stocks fall into this category. The performance of such stocks is linked to the health of the economy. When the economy does well, the prices of such stocks are usually high, and when it performs poorly, the stock loses significantly in value. For example, when the economy flourishes, people move out of their homes and invest in buying cars, homes, shops and travel, so prices go up. And when the economic downturn begins, these discretionary spending are the first ones consumers cut from their wallets. However, in many cases, cyclical stock prices When the economy recovers after a recession and even (at times) exceeds its old value. Many such stocks have (sometimes) upside potential and are, therefore, considered a favorite among many investors.
Sometimes when a company has assets worth more than its stock price, that stock is considered a value stock. Investors see such stocks as undervalued stocks and believe that the value of its shares will increase as the company grows. And if the company doesn’t do well then there can be loss too.
Apart from food, fuel and health services, there are other things that every human being needs at all times. Even if the recession begins, no one stops them from eating food, refueling in empty tanks or going to hospitals. Shares of such critical services are considered defensive stocks.
Such stocks are virtually immune to any economic downturn, profit or financial meltdown. And when the economy is bad, so does its demand.
In today’s time of globalization and fierce competition among competitors, even a small accident can have a bad effect on the economy. Thus it is the responsibility of the individual investor to understand the specifics of all types of stocks or even other forms of investment before coming to any conclusion; In the end, what matters is the tact and wisdom of investors.