There are different types of common stock which are categorized on the basis of their difference on investment characteristics. All of these types of common stock represent an ownership in the relevant company. Some stocks are volatile while others are stable. Some offer Dividends to their holder while others don’t. Similarly some are investments in recent year while others are speculations about future year events. In fact these stocks are categorized on the basis of their specific investment characteristics.
- Blue Chip Stocks
- Income Stocks
- Cyclical Stocks
- Defensive Stocks
- Growth Stocks
- Speculative Stocks
- Penny Stocks
- Blue Chip Stocks
Blue chip stocks are considered as the best one among all types of common stock. There is no specified definition of the blue chip stocks but the investment professional have idea about these. One common definition of blue chip stock is that it represents a company that has been paying long, uninterrupted dividends to its shareholders for a very long period of time. Blue chip is a term that is commonly used to specify high quality like blue chip high school etc. In the area of investment, there are many stocks that are highly qualified but do not meet the criterion of uninterrupted dividend history. The routine newsletters of brokerage firms recommend certain stocks as blue chip although some of them lack the feature of dividend payment to its shareholders.
It is desire of almost every company to pay dividends to its stockholders. If a company is continuously paying dividends then it is not beneficial for it to stop the payments of dividends. There may arise some extraordinary circumstances that halted the continuity of dividend payments. For example Citicorp Company had been paying dividends continuously since 1812 to 1990. But due to banking industry problems & economic recession it reduced its dividend payments to 44% and in 1991 the dividend payments were eliminated. But in 1994 the board of directors of Citicorp resumed the dividend payments.
- Income Stock
According to law it is essential for company to pay dividends from its earning rather than from borrowed money. The net income after tax (NIAT) is the bottom line earnings of the company. The decision of dividend payment is made by the board of directors by keeping in view the best interest of its shareholders. Either the entire NIAT can be retained in the company or the entire earnings are paid out as dividend. But it is suitable to distribute a portion of NIAT as dividends and other portion is kept as retained earnings. The payout ratio of the company is the portion of NIAT paid as dividend.
Income stock includes those stocks that have been paying more than average percentage of NIAT to their shareholders in the form of dividends. Companies that are included in the list of public utilities are best examples of income stock like telephone companies, electric companies and natural gas companies.
- Cyclical Stocks
The stocks of the company whose luck is directly associated with the condition of overall national economy are considered as cyclical stocks. During boom period of economy, the performance of these stocks is effective while in case of recession their performance become poor.
The term cyclical does not represent chart patterns or the prediction about the movement of the stock prices. Their cyclical feature is representation of business cycle. The example of cyclical stock includes steel companies, automobile producers and industrial chemical firms. The market risk of cyclical stock is generally higher than average.
- Defensive Stock
Defensive stock is that stock that is greatly immune to the fluctuations in the macro economy. It is important feature of defensive stock that it continuously sells its products in the market regardless of the bullishness or bearishness of the overall market.
There are four special industries that are better example of defensive stock. These industries are retail food, grocery stores, tobacco & alcohol companies and the utilities companies. People utilize the products or services of these different companies although the economic condition is good or bad. The market risk of defensive stock is lower than average.
- Growth Stocks
The growth stocks do not offer any kind of dividend to their shareholders as compared to the income stocks which must offer dividends. Similarly there is no perfect definition of growth stock. Mostly people consider growth stocks to those companies which do not offer dividends to their shareholders and reinvest all the most of their income to new potential investment opportunities. Some other investors considers growth stocks as the ones which can offer greater overall return as compared to level of risk connected with the stock.
It is the perceptions of the investors who make the growth stock profitable. There are certain companies that do not offer dividends to its shareholders and it is assumed in the market that they will continue this policy in future. Such kind of common stock is definitely growth stock. The stock that does not offer any dividend and nor it does increase its value is considered to unattractive investment.
- Speculative Stocks
Types of common stocks include speculative stock that has potential to pay its holders a great amount of money in a shorter period of time. Risk and return of a stock has direct relationship. In case of speculative stock the level of risk is very high. In other words the speculative stock offer both higher returns as well as higher level of risk. Investors are attracted to speculative stocks due to their higher degree of profit in shorter period of time.
There are certain analysts who recommend speculative stock as growth stocks on the basis of risk factor. The stocks of computer related DELL Company is considered as growth stock instead of speculative stock because DELL does not offer dividends to its shareholders. While other investors considers the computer company not offering any dividend is grouped as speculative stock. Mostly stocks of new companies are considered as speculative stock and currently electrical & technological firms are example of this type of stock.
- Penny Stock
Penny stocks are inexpensive stocks that are sold for less than $1 per stock. These stocks indicate the smaller companies that are performing poorly over a longer period. These stocks are considered as the lowest category stocks in the market.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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