Investors love to put stocks into various categories to make it easier to identify them. There are probably more than a dozen stock classifications. but we will describe only the following five here: blue-chip, growth, income, cyclical, and interest-rate-sensitive stocks.
Blue-chip stocks are stocks of the biggest companies in the country. They are usually the stocks of high-quality companies with years of strong profit and steady dividend payments. They are also some of the safest stocks in which to invest. You will probably not get rich overnight by investing in these stocks, but you will sleep better knowing that you won’t lose your hard-earned money either. The stocks that are part of the Dow Jones Industrial Average stock index, for example, are considered blue-chip stocks.
Growth stocks are stocks of companies with profits that are increasing quickly. This increase in profits is reflected in the rise in the company’s stock price. The definition of the level of profit growth that marks a growth stock varies from time to time. At this writing, however, net profit growth of 15% to 20% is the standard. Just as a tree can’t grow to the heavens, a stock can’t grow forever. At some point, the growth rate will slow to a modest rate of 10% or less.
A growth company usually spends a lot of money on research and puts all its profits back into the company instead of paying dividends. In addition, it usually sells unique products, and these days, it is likely to be a high-technology company that depends on intellectual power (such as software companies). Some software, Internet, and other computer-related companies can be considered growth companies. While the stock prices of growth companies increase more rapidly than the stocks of some blue-chip companies, they are also riskier because their prices can tumble just as quickly as they rise. Here are examples of growth stocks in a recent article.
Income stocks are the stocks of stable companies that pay large dividends. Older people who are retired often buy stocks in these stable income companies, since it provides them with a steady income that’s also more than they can earn by investing in bonds or putting their money in savings accounts. These investors are more interested in getting cash in their hands to meet their modest lifestyles than in holding the more risky growth stocks. Institutions such as colleges also put their money in income stocks to provide them with a steady stream of dividends to keep their doors open, instead of depending on stock prices to go up. The stocks of electric utility companies are typically considered income stocks. Here is Forbes Magazine's recent list of top income stocks.
Cyclical stocks are stocks in companies whose fortunes go up and down with the business cycle. Stock prices of these companies go up when general business conditions are good (as reflected by a bull market), and the prices go down when general business conditions are bad (such as in a bear market). Cyclical companies usually invest in heavy equipment to make their products, and they are known for laying people off when business is down. Cyclical companies can be found in the following types of industries: paper, chemicals, steel, machinery and machine tools, airlines, railroads and railroad equipment, and automobiles.
Interest-rate sensitive stocks are affected primarily by changes in interest rates. Banks and other financial companies can be considered interest-rate sensitive companies. These companies feel the effects of any move by the Federal Reserve to hold off inflation or to kick-start the economy.