A stock gives an individual a share of ownership in a company. Stocks, a common investment vehicle, are available in different categories. Many of them have similar characteristics, such as moving in the same direction. Some stock categories are better investments than others, and some can fit into multiple categories. Each category should help investors make better investment decisions.
Blue chip stocks are shares in large, stable companies that are continually profitable. They grow slowly and their earnings are extremely dependable. These stocks are expensive but provide the lowest risk and have an established track record for earnings.
Startup companies with little financial history typically issue speculative stocks. These companies often develop new, untested products, or they explore untapped markets. This type of stock comes with a high amount of risk because many of these companies do not succeed; but the potential to get a huge return makes them appealing to some investors. If the company is successful, the stock will grow in value and increase the investor's rate of return.
Growth stocks are issued by companies that are expected to have high earnings. However, the earnings are reinvested back into the business to fund development. These stocks pay low dividends, if any. This doesn't deter some investors, because as the company grows, its stock value is likely to increase.
Value stocks are viewed as undervalued in the market, but investors see potential. The company that issues the stock has assets that are worth more than the stock price. Investors believe the company's shares are a bargain and will become more valuable in the future when the company's troubled industry improves or the company grows.
Income stocks often are blue chip stocks from well-established companies. The stocks normally pay high dividends; at times this may include the majority of earnings. This is the least volatile class of stock that provides investors with a consistently growing income stream. Companies with this type of stock are usually in stable industries such as energy, finance, utilities and natural resources.
Penny stocks are low-priced stocks with high risk. They trade at no more than $5 per share and sometimes as low as 2 cents a share. This type of stock typically is issued by small startups that need to make money. If the company does well, the stock's value can increase dramatically. However, most stocks in this category fail to thrive.
Cyclical stocks are dependent on the health of the economy. During strong economic times, the stocks flourish. During tough economic times, they lose a substantial amount of value. The companies that issue these types of stocks can be found in the airline industry, electronics or car manufacturing.