When you're choosing stocks from among the thousands that are available in the United States and around the world, you can narrow the field in many ways. You might buy shares in the company you work for. You might concentrate on companies you know, either because they're local firms or because they provide products and services that you use. You might make some investments in large, well-established companies, or in companies that are just emerging as leaders in a new field.
Stocks with histories of paying dividends consistently
are sometimes described as income stocks, though that's not an official
designation. Companies like General Electric have paid dividends for more
than 50 consecutive years. Growth stocks are shares in companies that have the potential to increase in value over time. Often the issuing company reinvests its profits to expand and strengthen the business. Investors buy these stocks because they expect the price to go up as the company grows.
Both dividend income and and any profit you may realize from selling a stock you've owned for more than a year are taxed at the long-term capital gains rate. That's 15% for people whose regular income tax rate is 25% or higher, and 5% for those whose regular rate is 10% or 15%.
Stocks in the largest, consistently most profitable
companies are known as blue chips, after the most valuable poker
chips. It's not an official designation, though, and the list does change
from time to time. Blue chips usually offer predictable dividend income, and steady if slow to moderate growth in value. They are often more expensive than stock in lesser-known or smaller companies, though they can fall significantly in price in a market downturn.
Penny stocks are at the other end of the scale. They generally sell for $5 or less a share, which makes them more affordable than higher-priced stocks. But penny stocks are more risky investments. While some penny stocks may increase substantially in value, many of the companies may never be profitable or may fold entirely. And there's usually little information available that you can use to evaluate them.
Some stocks are described asvalue stocks. They tend to be lower-priced than the reputation or potential of the issuing company would suggest is justified. That may be the case for a variety of reasons. Often the company has had financial or management problems, its products or services have been underestimated, or its industry out of favor with investors.
Defensive stocks, in industries such
as utilities, drugs, healthcare, and food, are often more resilient in recessions
and stock market slides - at least theoretically - because product
demand continues. Many investors include these types of stocks in their
portfolios as a hedge against sharp losses in other stocks. Cyclical stocks, on the other hand, may flourish in good times and suffer when the economy dips. Hotels and resorts, for example, tend to lose money when business and pleasure travel are cut back. If you buy cyclical stocks as the economy rebounds, the cycle may work in your favor.
Some companies offer different categories of stock to
appeal to different types of investors. If you have common stock,
you share directly in the success or failure of the business. If it has
large profits, you may receive a larger dividend or the share price may
climb. If the company has a bad year or a series of bad years, usually you
earn less or your stock loses value. With preferred stock, the dividends are usually fixed and are paid before dividends on common stock. You may even get some of your investment back even if the company goes out of business. The downside is that your dividends usually stay the same even if company profits jump, and the share price climbs slowly if at all.
Another choice is between large and small companies.
A company's size is determined by its market capitalization, or the
number of outstanding shares multiplied by the current price of one share.
Large company stocks often pay dividends, and their share price may increase as well. They're often more resilient in tough times because they have more assets, though there's no guarantee that will be the case. They also tend to be more expensive than stocks in smaller companies.
Small company stocks are usually considered growth stocks, but sometimes stocks in profitable small companies provide income as well. Small companies have fewer resources to fall back on in tough economic times, so declining profitability can hurt the value of your investment.
WHAT IS A STOCK SPLIT?
If a company thinks the price of its stock is too high to attract investors, it can split the stock - that is, give stockholders more shares and revalue the stock at a lower price.
If the stock is split two for one, the price is cut in half and the number of shares is doubled. Initially, the total value of your stock is the same - like getting two nickels for a dime.
For example, if you had 100 shares of a stock selling for $80 a share that split two for one, you'd have 200 shares valued at $40 a share. But if the price climbs back toward its presplit price you might end up with 200 shares valued at $80 a share. Of course, there's no guarantee that will happen.
Stocks can split three for one, three for two, ten for one or any other combination. There can even be a reverse split, where you exchange more shares for fewer. If the reverse split is 10 for 5, each new share will be worth twice as much as an old one. Reverse splits can make a stock attractive to many institutional investors who often do not buy stocks priced under $5 per share. They are also sometimes used to increase the stock price enough to meet a stock market's listing requirements.
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