Stocks I: Stock Types and Returns

Hopefully, you’ve read my intro to stocks, if not, read it here.

The stock price of a company does not necessarily reflect the value of the company, instead, it is a reflection of what investors think the company is worth.

On generic terms, there are different types of stocks. They reflect the behavior — past, present, or anticipated — of the stock.

TYPES OF STOCKS

Value Stock: These are stocks that trade at a lower price relative to their fundamentals, such as dividends, earnings, and sales, making them appealing to investors with longer time horizons with the hope that the market corrects itself (recognizes them and price them what they truly worth). Their current prices are less than what they should trade for.

In short, they traded at a discount

Remember, the price of a company does not necessarily reflect the value of the company, it reflects the sentiment of investors. That means a good company can trade at a price less than what it truly worths.

They are good come rain, come shine.

Blue Chip Stocks: These are stocks of very large and well-recognized companies with a long history of sound financial performance. These stocks are known to have capabilities to endure tough market conditions and give high returns in good market conditions.

RETURNS

The reason to invest is to make a PROFIT or have a SOURCE OF INCOME. There are two types of returns provided by investing in stocks.

The profit is referred to as capital gain.

  • Dividends: So let’s say a company makes a profit, the board of directors can decide to share part of the profit to shareholders.This money is known as dividends. Dividends are paid periodically therefore they can serve as a steady source of income. It is also important to check if the dividend paid increase over time( dividend yield) as a fixed amount over time has lesser value due to inflation.

Companies are not obligated to paid dividends

There are however companies that are required by the law to pay a certain percentage such as REIT stocks.

Capital gains are a one-off thing unlike dividends that is continuous

Remember, your returns should beat inflation. Want to know why? Read here

CONCLUSION

  • Different stocks are of different types.
  • Some stocks fit into more than one type.
  • Stocks can serve as a source of income through dividends.

Read the previous article here

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