Stock Types




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 Sheets.

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 types.

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 quickly.

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.


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 sour.

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 seeking.

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



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