Stock Market
Classification Of Stocks

A sector denotes a distinctive subset of a market, industry or the financial system whose constituents have comparable attributes. In other words, a sector means a cluster of firms that are more or less associated with the same industry and offer the same services or merchandise. Often, stocks are classified into different sectors depending on the corporation’s business. For instance, stocks of different sectors comprise software, technology, automobiles, airlines, oil, chemicals, retail, and pharmaceuticals etc. In fact, for people who desire to invest in the stock market, it is essential to comprehend the different sectors. The rationale behind this is easy to understand. Irrespective of the manner in which the stock market may be performing and also whatever may be the prevailing situation of the economy, there are always some sectors that are either performing well and some that are under pressure.

For instance, stocks of a number of sectors, such as the Internet sector, computer sector and the semi-conductor sector were constantly plummeting all through the recent bear market. As a result, many knowledgeable depositors transferred their money from these loss-making sectors to the retail and housing sectors that have been doing well of late. It is true that throughout 2001 and 2002 stocks of the retail and housing sectors performed extremely well.

It is worth mentioning here that there are many professional stock traders who keep on transferring their money from one stock to another virtually on a daily basis. Having recognized the most profitable sectors on a particular day, these professional traders choose the stock of a particular sector that they deem would provide them with the maximum earnings among the assortment of sectors. However, it needs to be underlined here that like in any sphere of life, it is easy to state things than actually perform even in the stock market. So, transferring money from one sector to another is easier said than done. In other words, it is always more easy to suggest which sectors would yield more profits on a particular day and put your money in its stocks.

Categorizing stocks

Income stocks

Income stocks are basically shares of different corporations that refunds money to the investors as dividends and are, hence, also known as dividend shares. In fact, while classifying stocks, the dividend stocks are top in the list. Generally, people who have superannuated or close to their retirement prefer income stocks as the dividends and interests earned from investing in these stocks as well as bonds possessed by them form the main source of sustenance. Moreover, the stocks that make recurring payments or dividends are more stable. Unlike other stocks in the share market, the value of the income does not go up or drop very frequently. Hence, the income stocks are a favorite of the traditional investors. In addition, another benefit of investing in income stocks is that they lessen the loss of the shareholders when the prices of the stocks fall.
Nevertheless, several disadvantages are also associated with purchasing income stocks. As the dividend received from investing in the income stocks are taxable, the investor is required to inform the Internal Revenue Service or IRS regarding the amount earned from the income stocks every year. In addition, if any corporation does not raise its dividend percentage, the investors’ profits will fall in the face of the increasing price rise. And the fact is that majority of the corporations do not increase their dividends annually. Last, but not the least, even the value of the income stocks can plunge as rapidly as any other stock in the market. There is no guarantee that your income stocks will remain safe and continue to yield profits even if the stock market takes a plunge.

Value stocks

Good stocks of a profitable corporation that are selling at great prices are known as value stocks. In other words, value stocks usually trade at a higher price in comparison to their original worth or value. However, the secret of achieving this is obviously deciding on which corporation is really good and is doing exceptionally well. In the investors’ terminology, this is known as the intrinsic or inherent value of a corporation/ stock. There are a few inexpensive stocks that appear to be a good deal, are basically economical for a definite cause.
In most cases, value stocks are those issued by the traditional corporations like the banks and insurance firms who have the potential of obtaining high prices some time later on, if not straight away like many other prevailing stocks. In fact, an investor need to undertake a lot of research to find out stocks of a corporation whose price is a good deal in comparison to its real value. All investors who prefer buying value stocks possess several basic means, such as the P/E ratios, that enable them to find out and invest in the bargain or value stocks.

Growth stocks

Growth stocks are stocks issued by a corporation that is increasing its earnings or revenue much faster than the other stocks in its sector. Normally, these companies include high-tech industries and earn at least 15 per cent or more annually and are expected to develop more rapidly compared to its competitors. Such companies or corporation generally pay very little or no dividend at all to the investors. Instead, they choose to invest their earnings in the further development of the corporation. It may be mentioned here that even if the performance of these companies are nothing stunning, the price of the growth stocks may be exceptionally high. This is basically owing to the fact that people investing in growth share are of the view that the earnings of the company will go up in future enabling the price of the stocks they are possessing to go up. These investors have great faith on such corporations and, hence, are prepared to take the risks.
As mentioned earlier, the corporations issuing growth stocks do not generally pay any dividend to their investors, as the total money earned by them is invested in the development of the company. Moreover, since the growth stocks are normally very unstable, their prices are likely to shift in any direction unexpectedly. Although growth stocks are perfect for investors making short-term endowments, their volatile nature is generally frightening for the majority of the investors. It is interesting to note that when virtually every investor raved and ranted about the growth stocks all through the 1990s, they even influenced the buy-and-hold investors, as many of them were lured to invest in growth corporations such as Sun Microsystems, Cisco and Dell Computer.

Dividends

Dividends are defined as taxable payments announced by the board of directors of a company and paid to the shareholders from the company’s present or preserved earnings. Usually, dividends are paid once in every three months and in cash. In fact, dividends or payouts serve as an incentive to many investors who purchase stocks in established companies that may not be experiencing sufficient development. It may be mentioned here that most of the companies that pay dividends to their shareholders have possibly reached a stage beyond the development period and do not find it necessary to re-invest their earnings for further growth.

In fact, there are numerous depositors who prefer income stocks as they pay dividends. Now, let us find out how exactly the dividends operate. Plainly speaking, corporations that make sufficient profits pass some of it to their shareholders through payments called dividends. As mentioned earlier, dividends are usually paid quarterly and in cash, to be precise in cheques. However, if a shareholder wants he or she may re-invest the dividend amount in purchasing more stocks of the same company.

Actually, dividends are a brilliant concept. They not only enable an investor to earn money when the price of their stocks go up in the market, but also help them to get an additional benefit or bonus from the company as dividends. It must be remembered that it is not obligatory on the part of the board of directors of any corporation to pay dividends to their shareholders. Instead, it is a good gesture by the board to make additional payouts to the shareholders when the company is performing exceptionally well.

Investors owning plenty of shares of a particular stock, say 5000 or even more, dividends received by them every quarter may sum up to a considerable amount. Supposing a corporation pays a dividend of $0.25 on each share once in every three months on the 5000 shared owned by an investor, the amount sums up to $1.0 annually. In effect, this means that the shareholder will receive $1250 quarterly and a sum of $5000 annually. On top of this, in the event of the price of the stock owned by the investor soars in the market, he or she will also make additional money if they intend to sell the stock.

It may be mentioned here that dividends are very popular among the investors, especially the retired people or those nearing superannuation. This is because there are several people whose sustenance depends on the quarterly dividend cheques they receive from the corporations. In fact, there are lots of people who prefer to invest only in stocks that pay bulky dividends. If you look at it closely, you will find that the old-fashioned corporations that paid or continue to pay dividends were actually big blue-chip companies that are listed in the Dow Jones Industrial Average. It may be mentioned here that the term ‘blue-chip’ has derived from the game of poker, where blue chips are of greatest value. Such blue-chip corporations are normally inclined to draw the aged investors who prefer dividends to the rise in stock prices. These older generation investors seldom trade the stocks they possess.

It is regrettable that presently most of these large blue-chip companies have either reduced the dividends or totally got rid of the quarterly bonus payments to their shareholders. During the 1990s, most of the corporations re-invested most or all of their earnings in expansion projects refusing to pass on any share of their profits to the shareholders. This virtually was the beginning of the end of the practice of paying dividends. Especially, the technology companies were never in favor of paying dividends to their shareholders. If any one is interested in investing in stocks of corporations that still pay dividends, they may look up in business section of the daily newspapers to find which corporation still pays dividends and how much they pay quarterly.

Penny stocks

Like their name, penny stocks are those that sell for below one dollar a share. In some cases, even stocks that sell less than five dollar for a share are also called penny stocks. In fact, majority of the penny stocks have only a few million dollars in disposable material assets and possess a brief operating history. It may be mentioned here that since stocks of relatively smaller corporations normally do not fulfill the basic minimum prerequisites for being listed on any prominent stock exchange, they are bought and sold in the over-the-counter (OTC) market on the National Association of Security Dealers Automated Quotation System (NASDAQ). Often the penny stocks are also referred to as pink sheet stocks simply owing to the reason that in the past the names as well as the prices of these stocks were printed on pink sheets.

One of the benefits of trading penny stocks is that almost everyone can afford to purchase them owing to their extremely low costs. For instance, an investor is able to buy as many as 2000 shares of penny stocks valued at $0.50 with a small endowment of $1000. In the event price of the penny stocks purchased at $0.50 per share goes up to one dollar each, the investor will make a net gain of $1000 – double the amount he or she had invested or precisely a 100 per cent gain. In fact, this is the basic attractiveness of the penny shares. On the other hand, let’s presume that the investor had purchased penny stocks at $0.75 per share and a few days later the value of these penny stocks drop to $0.50 per share, he or she would be losing $500 if they sold the 2000 penny stocks they possess. Such price fluctuations are widespread with all stocks, especially the penny stocks. Although trading in penny stocks may appear to be a simple affair, actually it is not so in reality. In fact, some stock traders are specialized in dealing with penny stocks.

Have you ever tried to find out why the penny stocks are so inexpensive? Be sure there is definitely a reason for these stocks being lowly priced – it could be anything from bad management to lack of earnings to excessive debts. Whatever may be the reason, generally not many people prefer to buy penny stocks despite their cheap price and this is the primary reason why their prices never soar. Hence, the low price of the penny stocks notwithstanding, they are not heavily traded in the market.

There are some disadvantages associated with penny stock trading too. In fact, when the volume of trade of a stock is abysmally low, like in the case of penny stocks, it is possible for anyone with some expertise in stock market is able maneuver or control the price. Although this may appear to be incredible, this is a common phenomenon with penny stocks. For instance, if any investor owns a $1 stock that is trading as few as 25,000 shares on a particular day, when anyone purchases 10,000 of these shares, the deal is expected to have an impact on the price of the shares. Interestingly, this is one particular reason why some people prefer to buy and sell penny stocks on a regular basis.

It is really unfortunate that the extremely low volume of trade of the penny stocks also make them popular among some unscrupulous people, mostly in lowly professions such as working in boiler rooms. It may be noted here that a boiler room is basically a procedure that engages a group of persons to make telephone calls to people they are not familiar with a view to persuade them to purchase stocks that are almost rubbish. If the prices of these worthless stocks go up owing to some heavy trade following the persuasion by the boiler room people, the boiler room workers, also known as insiders who have some knowledge regarding the trading of the particular shares dispose off the shares held by them immediately for considerable profits. It is really unfortunate that by the time the common investors owning such shares want to sell their shares, it is usually very late as by then the prices of the shares have already nosedived. Thus, in most cases, the common investors suffer huge losses, losing all or most part of their investments.

Like in any other sphere of life, there are exceptions to everything that is associated with the stock market. It is surprising to note that some shares of some ‘one-upon-a-time’ prominent corporations are now trading for below a dollar. Despite, the pitiable condition of these companies now, it is always advisable to purchase penny stocks of such corporations that have a glorious history and book value (the precise worth of a company). This is because purchasing the penny stocks of these once high-flying corporations is usually safer compared to buying stocks of companies that have no history or no earnings. Nevertheless, it is essential that anyone desiring to invest in penny stocks should do enough research before venturing out to actually buy them.