The Major Classification of Stocks
If you want to understand the stock market, you should understand the different ways in which people classify and identify stocks.1 Here is a summary of some different stock types.
A sector is a group of companies that loosely belong to the same industry and provide the same product or service. Examples of stock sectors include airlines, software, chemicals, oil, retail, automobiles, and pharmaceuticals, to name just a few. Understanding sectors is important if you want to make money in the stock market. The reason is simple: No matter how the market is doing and no matter what the condition of the economy, there are always sectors that are doing well and sectors that are struggling.
It’s a lot harder to pick successful sectors than many people think. Nevertheless, it’s worth taking the time to understand and identify the various sectors and to be aware of which sectors are strong and which are weak. This could give you a clue as to where the economy is headed.
Income stocks include shares of corporations that give money back to shareholders in the form of dividends. Some investors, usually older individuals who are near retirement, are attracted to income stocks because they live off the income in the form of dividends and interest on the stocks and bonds they own. In addition, stocks that pay a regular dividend are less volatile. They may not rise or fall as quickly as other stocks, which is fine with the conservative investors who tend to buy income stocks. Another advantage of stocks that pay dividends is that the dividends reduce the loss if the stock price goes down.
There are also a number of disadvantages of buying income stocks. If the company doesn’t raise its dividend each year — and many don’t — inflation can cut into your profits. Finally, income stocks can fall just as quickly as other stocks. Just because you own stock in a so-called conservative company doesn’t mean you will be protected if the stock market falls.
Value stocks are stocks of profitable companies that are selling at a reasonable price compared with their true worth, or value. The trick, of course, is determining what a company is really worth — what investors call its intrinsic value. Some low-priced stocks that seem like bargains are low-priced for a reason.
Value stocks are often those of old-fashioned companies, such as insurance companies and banks, that are likely to increase in price in the future, even if not as quickly as other stocks. It takes a lot of research to find a company whose price is a bargain compared with its value. Investors who are attracted to value stocks have a number of fundamental tools that they use to find these bargain stocks.
Growth stocks are the stocks of companies that are expected to grow faster than the competition. The price of growth stocks can be very high even if the company’s earnings aren’t spectacular. This is because growth investors believe that the corporation will earn money in the future and are willing to take the risk.
Most of the time, growth stocks won’t pay a dividend, as the corporation wants to use every cent it earns to improve or grow the business. Because growth stocks are so volatile, they can make sudden price moves in either direction. This is attractive to short-term traders, but may be unnerving for many investors.
1Investing in stocks involves risk, including loss of principal.
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content. © 2013 S&P Capital IQ Financial Communications. All rights reserved.