BLUE CHIP STOCKS
The stock market term "blue chip" comes from poker, where the blue
chips carry the highest value. Large, established firms with a long
record of profit growth, dividend payout and a reputation for quality
management, products and services are referred to as Blue Chip
companies. These firms are generally leaders in their industries and
are considered likely candidates for long-term growth. Because Blue
Chip companies are held in such high esteem, they often set the
standards by which other types of companies in their fields are
measured. Well-known blue chips include IBM, Coca-Cola, General
Electric and McDonald's.
Blue chip stocks are included in the Dow Jones Industrial Average,
an index comprised of 30 companies that are all major players in their
respective industries. Popular among individual and institutional
investors alike, the 30 stocks listed on the Dow account for about one
fifth of the total market value (over $8 trillion) of all U.S. stocks.
The types of Investors blue chip stocks attract are the ones who seek
investments that pay moderate dividend yields and grow. These types of
stock are usually priced high because of their demand, have relatively
low volatility and deliver a steady stream of dividends. The main
downside is that, since they are so large, they have little room to
appreciate, compared to smaller, up-and-coming types of stock.
Penny stocks are low-priced, speculative stocks that are very risky.
These stocks are generally issued by the type of companies with a short
or erratic history of revenues and earnings. They are the lowest of the
low in price and many stock market exchanges choose not trade them.
Penny stocks (also called designated securities) have these specific
qualities: they sell for less than $5, they are sold over the counter
(but not on the NASDAQ), and their companies have 2 million dollars or
less in net tangible assets. They are listed daily on the Pink
The appeal of penny stocks comes from their low price. Though the
odds are against it, if the company that issued them suddenly finds
itself on a growth track, their stock share price can rise rapidly.
This type of stocks is popular among small speculators.
Income stocks are stocks that pay higher-than-average dividends over
a sustained period. These above average dividends tend to be paid by
large, established companies with stable earnings. Utilities and
telephone company stocks are often classified as income stock
Income stocks are popular with types of persons investing for steady
income for a long time and who do not need much growth in their stock's
value (though some growth does occur). In this sense, investors who
choose them have something in common with bondholders. Income stocks
can actually be more profitable than bonds. To maximize income, some
investors will even seek out companies that frequently raise their
dividends and are not saddled with debt.
A value stock is a type of stock that is currently selling at a low
price. Companies that have good earnings and growth potential but whose
stock prices do not reflect this are considered value companies. Both
the stock market and people investing in it are largely ignoring their
stocks. Investors who buy value stocks believe that these stocks are
only temporarily out of favor and will soon experience great growth.
Any number of factors such as new management, a new product or
operations that are more efficient may make a value stock grow
Many companies alternate between value and growth types of
classification. It is a normal aspect of the business cycle. Investing
in value stocks is attractive for those who watch markets carefully for
undervalued stocks they feel will move upward.
OTHER TYPE OF STOCKS
Defensive stocks are those whose prices stay stable when the market
declines and are issued by industries that naturally do well during
recessions. Food and utilities companies are defensive stocks. Debt
collection companies also tend to perform well when the market turns
Cyclical stocks are a type of stocks that move up or down in sync
with the business cycle. Examples include the housing industry and
industrial equipment companies, because these companies serve the needs
of growing economies. Investors who do not mind buying and selling as
the market fluctuates tend to like cyclical stocks. Individuals who
prefer to hold a stock for a long time may not like them unless they
can weather ups and downs in the stock's value.
Gold stocks are the stocks of gold-mining companies. Their value
moves up or down with the price of gold.
Treasury stock is a type of stock that has been bought back by the
company that issued it. Companies may buy their stock back from
investors when they believe it is underpriced on the market. The
company can then set aside the stock for future uses such as debt
payment or the awarding of stock options.
If you are about to begin investing in stocks, understanding the
financial markets may be as confusing as the cockpit on a 747 airplane.
All of the financial, speculative and market data that is available can
leave you feeling overwhelmed, but without knowledge that you were
Although people have been trading and investing on the stock market
for over 200 years ago, there are still many people not familiar with
some basic aspects of this arena. The stock market is an everyday term
we use to talk about a place where stocks and bonds are "traded" —
meaning bought and sold. Stocks are units of ownership in a company.
The sophisticated term for issuing stock to raise money is equity
financing. The money received from investors who buy stocks is called
equity capital. Companies issue stock to raise money. They use this
money to finance expansions, pay for equipment or any other
resource-intensive activity. Corporations may issue stock when they
need additional capital to operate successfully. If the company's
profits go up, you "share" in those profits. If the company's profits
fall, so does the price of your stock. If you sold your stock on a day
when the price of that stock goes above the price you paid for it, you
would make money