When an investor believe that a company’s stock price will rise, he can buy it to make a potential profit. In addition, if the company becomes more profitable, it may also pay dividends to shareholders.
Therefore, the total return on a stock, consists of both capital gains and dividends. Some stocks pay generous dividends, but their prices may change little over time. Others stocks pay little or no dividend, and most of the return comes from capital gain.
Types of Common Stocks
Common stocks can be classified based on how much they pay in dividends, and how fast their earnings are expected to grow. Some of the classifications includes:
| BLUE CHIP STOCKS | Stocks often associated with well established companies. |
| SPECULATIVE STOCKS | Stocks with highly volatile prices that are often rumor-driven and considered riskier investments |
| INCOME STOCKS | Stocks that produce most of the returns through dividends, not price change. |
| GROWTH STOCKS | Stocks of companies that have experienced rapid sales and earnings growth, which are expected to continue in the future. |
| CYCLICAL STOCKS | Stock prices are related to overall health of the economy |
| DEFENSIVE STOCKS | Stock prices remain fairly unaffected by changes in the health of the economy |
To be a successful investor, it is important to understand what type of stocks you are buying.
Investors with lower risk tolerance tend to favor blue chip stocks because of their stable prices.
Others prefer income stocks, because they are attracted to high dividend payouts.
Short-term traders tend to like speculative stocks and growth stocks because they allow them to make greater profits in a much shorter time frame.
Sophisticated investors may construct a portfolio of cyclical stocks and defensive stocks, to reduce the overall volatility of the portfolio.
If you need advice on investment, please contact your trusted FLA Organization financial planner today!
