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Types of stock: What to know about blue chip, penny, growth, income, and value stocks

At a glance:

  • Blue chip stocks

  • Penny stocks

  • Growth stocks

  • Income stocks

  • Value stocks

  • Industry-type stock

  • Summary of types of stock

  • Practical ideas you can start with today

As an investor, you will come across different terms applied to types of stock.

Terms such as "blue chip," "penny stock," and "value stock" are descriptive of classes of stock and are intended to help the investor infer how this type of stock will perform in the investor's portfolio.

As an educated investor, you need to know what is meant by these terms and how they relate to your own investment objectives.

Blue chip stocks

The term blue chip comes from poker, where traditionally the blue chips carry the highest value. Large, established firms that are considered high-quality, dividend-stable, and financially solid are sometimes referred to as blue chip stocks.

Blue chip companies are leaders

These firms are leaders in their industries and are considered likely to grow for a long time. Because of this, they often set the standards by which other companies in their fields are measured. Well-known blue chips include IBM, Coca-Cola, General Electric, and McDonald's.

The Dow Jones Industrial Average comprises 30 blue chip stocks. Blue chips are also included on the S&P 500 and NASDAQ indexes. These make up a significant portion of the total market value of stocks listed on the New York Stock Exchange.

Who seeks blue chips?

Investors who seek investments that tend to pay steady dividends and that also grow are attracted to blue chip stocks.

These stocks can be priced high because of their demand and attributes, have relatively low volatility, and deliver a steady stream of dividends. The main downside is that, since they are so large, they may not grow as quickly when compared to smaller, up-and-coming stocks.

Remember, stock investments have an element of risk. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon, and risk tolerance are aligned with stocks before investing, as they can lose value.

Penny stocks

Penny stocks are low-priced, speculative stocks that are very volatile. They are the lowest of the low in price. Many stock exchanges do not trade them.

How to identify them

Penny stocks (also called designated securities) have the following specific qualities:

  • They sell for less than $5.

  • They are sold over the counter (but not on the NASDAQ).

  • Their companies have $2 million or less in net tangible assets.

Where to find them

They are listed on the Pink Sheets, which lists them daily. Before a broker-dealer may buy and sell penny stocks for a non-established customer, he or she must document the customer's suitability and get a written agreement for the first three purchases.

Why investors like them

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. These stocks are popular among small speculators.

Growth stocks

Growth stock is stock that is expected to appreciate in price. The earnings of the issuing company may grow faster than average.

Companies that have strong, steady growth and high profit margins are considered growth companies.

Don't count on dividends

Growth stocks pay few, if any, dividends, because profits are put back into the company to finance its continued growth. Investors who can forgo dividends, who can tolerate greater volatility, and who can be patient may be attracted to growth stocks. This is one example of when investors may employ a buy-and-hold approach.

Some sectors of the economy that experience growth are high technology, pharmaceuticals, and telecommunications.

It’s important to remember that stock investments have an element of risk. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon, and risk tolerance are aligned with stocks before investing, as they can lose value.

Income stocks

Income stocks are those stocks that 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 of companies that are considered to have income stocks.

Who buys them?

Income stocks are popular with investors who want steady income for a long time and who do not need to prioritize large growth in their stocks' value (though some growth does occur). In this sense, investors who choose them have something in common with bondholders. Income stocks can actually be more profitable than bonds.

To try to maximize income, some investors will even seek out companies that frequently raise their dividends and are not saddled with debt.

Value stocks

A value stock is a stock that is currently selling for a price believed to be lower than it should be selling for.

More about value stocks and value companies

Companies that have good earnings, growth potential or other signals of strength but whose stock prices do not reflect this are considered value companies.

Both the market and investors may be largely ignoring their stocks. Investors who buy value stocks believe that these stocks are only temporarily out of favor and will soon experience a value correction in the market.

Factors such as new management, a new product, or operations that become more efficient may make a value stock grow quickly.

Many companies alternate between value and growth – it is a part of the business cycle. Value stocks are attractive to investors who watch markets carefully for undervalued stocks they feel will move upward.

Remember, stock investments have an element of risk. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon, and risk tolerance are aligned with stocks before investing, as they can lose value.

Industry-type stock

These stocks are worth noting:

Defensive stocks

Defensive stocks are those whose prices stay stable when the market declines; some even grow. Industries that naturally do well during recessions issue them.

The general idea is that consumers continue to spend money on their basic needs (food, clothing, etc.) and decrease spending in other areas (luxury items, travel, etc.). Debt collection companies also tend to perform well when the market turns sour.

Cyclical stocks

Cyclical stocks are stocks that 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.

Investors who do not mind buying and selling as the market fluctuates may like cyclical stocks. Individuals who prefer to hold a stock for a long time may not like them, unless they can weather ups and downs in the stock's value.

Traders work on the floor at the New York Stock Exchange in New York, Wednesday, Jan. 8, 2020. (AP Photo/Seth Wenig)
Traders work on the floor at the New York Stock Exchange in New York, Wednesday, Jan. 8, 2020. (AP Photo/Seth Wenig)

Gold stocks

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

Treasury stock is 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.

The company can then set aside the stock for future uses such as debt payment or the awarding of stock options.

Summary of types of stock

Doing research before investing is important to a successful portfolio. It is wise to know the investment objectives of different types of stock.

When searching financial literature about different companies, it’s important to know how investors and advisors have classified their stock so you can make an informed investment decision. Different types of stock play different roles in meeting investment objectives.

Practical ideas you can start with today

  • Research stocks that fit your investment goals and risk tolerance.

  • Identify growth stocks or income stocks that are attractive buys, based on their advantages and disadvantages.

  • Meet with a broker, set up an online brokerage account, or contact a company to begin buying stocks.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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