Investors purchase shares due to the fact they consider that the inventory fee will upward jab and let them vendor for a greater charge than when they offered it. Other times, they prefer to accumulate the dividends paid by using the stock. Some shares meet these two goals, however most of the time they are labeled between growth, value, and income.
Growth Stocks
As the name suggests, companies that have growth stocks are those that have substantial potential for growth in the near future.
Growth companies may be growing with a faster speed that the broader market. They usually dedicate most of their current revenue toward further expansion.
There are growth companies at every sector of the market. However, they are more dominant in areas like alternative energy, technology, and biotechnology.
Most growth companies are companies that offer innovative products that are anticipated to make a huge impact on the market in the future.
However, there are exceptions to the rule. Some of them are simply well-managed and have good business models that capitalized on the demand for their products.
Growth stocks can offer significant returns on capital. However, many of them are smaller, not-so-stable companies that also experience wild price declines.
Value Stocks
Companies that are deemed undervalued offer long-term profits for those who do their homework. A value stock trades at a price that’s lower than its perceived true value based on its financial ratios.
These financial ratios include price-to-book or price-earnings ratios. The stock price may also have declined because of public perception of factors that have little connection to the company’s present operations.
For instance, the stock of a well-managed company that’s also financially stable may decline substantially for a short period of time if the CEO gets entangled in a widely sensational public scandal.
For smart investors, this is a good time to buy the stock. That’s because the public will forget about the incident soon enough and the price will probably revert back to its previous level.
Meanwhile, it is somewhat a subjective matter when considering what constitutes a good value for a given stock. It will definitely vary from investor to investor, who always have differing philosophies.
Value stocks are often less risky than growth stocks, since they usually come from well-established companies.
On the flipside, their prices usually do not always return to their previous higher levels as the investor expect.
Income Stocks
Investors seek income stocks to boost their fixed-income holding with dividend yields that are usually higher than those from instruments like Treasury securities and certificates of deposit.
Utility stocks are one type of income stocks that have historically remained fairly stable in price. However, they usually pay competitive dividends.
Meanwhile, preferred stocks are hybrid securities that act more like bonds than stocks. Preferred stocks often have call or put features and other similar traits, but they also provide competitive yields.
But even if incomes stocks are appealing for investors who are not willing to risk their principal, their values can decline when the interest rate rises.