Stocks: Here are the basic types

As an investor, you will encounter many different types of stocks. We break down the basics of what you need to know.

Video Transcript

- As an investor, you will come across different terms apply to types of stock. Blue chip stocks are considered high quality, dividend stable, and financially solid. These firms are industry leaders and are considered likely to grow over a long time. They can be priced high because of their demand and attributes, have a relatively low volatility, and deliver a steady stream of dividends. The downside is that they may not grow as quickly.

Penny stocks are low-priced, speculative stocks that are very volatile. They are generally priced under $5 a share. Many stock exchanges don't trade them. So instead, penny stocks are listed daily on the pink sheets. The appeal of penny stocks comes from their low prices. Though the odds are against it, if the company that issued them suddenly finds itself on a growth track, their share price can rise rapidly.

Growth stock is a stock that is expected to appreciate in price. Companies that have strong, steady growth and high profit margins are considered growth companies. Growth stocks pay few if any dividends, because profits are put back into the company to finance its continued growth.

Income stocks tend to pay higher-than-average dividends over a sustained period. Large, established companies with stable earnings tend to issue them. Utilities and telephone companies are good examples.

A value stock is a stock that's currently selling for a price believed to be lower than it should be selling for. Companies that have good earnings, growth potential, or other signals of strength, but whose stock prices don't reflect this, are considered value companies. Many companies alternate between value and growth.

Here are some industry-type stocks worth noting. Defensive stocks are those whose prices stay stable when the market declines. The idea is that consumers continue to spend money on their basic needs, such as food and clothing, and decreased spending in other areas.

Cyclical stocks move up or down in sync with the business cycle. Examples include the housing industry and industrial equipment companies, because these companies serve the needs of growing economies.

Gold stocks are the stocks of gold mining, exploration, and production companies. Their value moves up or down with the price of gold.

Treasury stock is a stock that has been bought back by the company that issued it. Companies may buy their stock back from investors because they believe it is underpriced on the market, want to consolidate ownership, or improve their financial ratios. Stay financially fit, friends.