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Stocks can also be classified into a number of different groups based on how investors view them.
Blue Chip Stocks are shares of large corporations with a long history of growth, stable earnings and less extensive liabilities. Such companies pay dividends regularly, providing a safe haven for risk-averse investors.
Value Stocks are stocks considered to be priced lower than their intrinsic value. Such companies seem to be “healthier” in valuation but lower in price than their competitors.
Growth Stocks are stocks with good prospects for growing faster than the economy or the market in general. Most times these companies reinvest their earnings and sometimes use leverage (run the company operations using debt) to a good extent. In these companies, growth is preferred over profitability. When investors take a stake in these companies, they expect continuous capital gains, hence the growth.
Income Stocks are stocks of companies that pay out a much larger portion of their profit (PAT) in the form of dividends to their shareholders. The companies seem to have reached a pace of growth that is rather slow and the business sometimes is no more expanding. Such shares are generally less risky than growth or small company stocks. Although shares of income stock aren’t expected to grow rapidly in value, their dividend payout acts as a kind of safety cushion beneath the share price. Even if the market in general falls, income stocks are usually less affected because investors will still receive their dividend.
Cyclical Stocks are shares of companies whose performance is intricately tied to the economy. They tend to prosper when the business cycle is on the rise and suffer in times of recession.
Defensive Stocks are stocks of companies believed to be less affected by the business cycle and thus immuned from the changes in the economy. People still go on to procure products and services from such companies even at bad times.
Speculative Stocks are stocks of young, untested companies that either have only recently been listed on the market or old companies that is showing some signs of rebounding following a new government policy or a promise of a new technology breakthrough. Investors buy speculative stocks with the hope of high profits. It’s worth keeping in mind, though, that buying speculative stocks is a very risky venture.