Types of common stock

Blue-Chip Stocks
Blue-chip stocks refer to companies with a long history of sustained earnings and
dividend payments. These established companies have developed leadership positions
in their respective industries and, because of their importance and large size, have
stable earnings and dividend records. Most companies in the Dow Jones Industrial
Average are considered to be blue-chip companies. However, some financially troubled
stocks such as AT&T, for example, cut their dividends and were removed from the Dow
and replaced with other, more solid companies.

Income Stocks
Income stocks have high dividend payouts, and the companies are typically in the
mature stages of their industry life cycles. Stocks of companies that have established a
pattern of paying higher-thanaverage dividends can be defined as income stocks.
Income stocks tend not to appreciate in price as much as blue-chip stocks do because
income stock companies are more mature and are not growing as quickly as are blue-
chip companies. This statement does not mean that income stock companies are not
profitable or are about to go out of business. On the contrary, they have stable earnings
and cash flow, but they choose to pay out much higher ratios of their earnings in
dividends than other companies do. 

Growth stocks
common stocks of smaller firms having sales and earnings growth in excess of industry
average. Usually these are stocks of companies that are new to the market so they still
have huge opportunities for growth. For example, in 2009, when 7-11 in the Philippines
is just new in the market and the price of its stock is only P4. But in 2017, the stock
price reached an all time high of P195 or a growth rate of 4,875% in just 8 years. 

Value Stocks
Value stocks are stocks that have lower prices relative to their fundamental values
(growth in sales and earnings). Value stocks tend to have low P/E ratios, low price-to-
book ratios, low price-to-sales ratios, and high dividend yields, and they also may be out
of favor with investors. One reason might be disappointing quarterly earnings. For
example, at the end of the economic expansion period, auto companies trade at lower
P/E ratios than the stocks of other companies because investors’ expectations for the
companies’ growth prospects are low. Because investors have relatively low
expectations for the immediate growth of these companies, their stocks trade at lower
prices relative to their earnings and dividends. Patient investors with longer time
horizons are willing to purchase these stocks and wait for their prospective earnings to
increase.
Cyclical Stocks
Cyclical stock prices move with the economy. Cyclical stocks often reach their high and
low points before the respective peaks and troughs of the economy. When the economy
is in recession, these stocks see a decline in sales and earnings. During periods of
expansion, these stocks grow substantially in sales and earnings. Examples of cyclical
stocks are stocks issued by capital equipment companies, home builders, auto
companies, and companies in other sectors tied to the fortunes of the economy as a
whole. The economic growth in 2005–2006 has seen the stocks of John Deere (ticker
symbol DE), the farm equipment maker, and Cummins Engine (ticker symbol CMI), the
diesel engine manufacturer, rise to their 52-week highs. During a recession, stocks of
this type are beaten down and are considered value stocks for patient investors who are
willing to buy them and hold them until the next economic turnaround. Cyclical stocks
appeal to investors who like to trade actively by moving in and out of stocks as the
economy moves through its cycle. 

Defensive Stocks
Defensive stocks are the stocks of companies that tend to hold their price levels when
the economy declines. Generally, these stocks resist downturns in the economy
because these companies produce necessary goods (food, beverages, and
pharmaceutical products). However, during periods of economic expansion, defensive
stocks move up more slowly than other types of stocks. Defensive stocks are the stocks
of companies whose prices are expected to remain stable or do well when the economy
declines because they are immune to changes in the economy and are not affected by
downturns in the business cycle.

Speculative Stocks
Speculative stocks have the potential for above-average returns, but they also carry
above-average risk of loss if the company does poorly or goes bankrupt. Speculative
stocks are stocks issued by companies that have a small probability for large increases
in the prices of their stocks. These companies do not have earnings records and are
considered to have a high degree of risk. In other words, these companies are quite
likely to incur losses and not as likely to experience profits, so they have a higher
possibility of larger price gains or losses than other types of stocks. Speculative stocks
are more volatile than the other stock types.

Penny Stocks
Penny stocks are speculative, low-priced stocks that generally trade on the over-the-
counter markets and pink sheets. [The pink sheets provide the listings, the quotes (bid
and ask) of the lower-priced, thinly traded over-the-counter domestic stocks and foreign
stocks.] Penny stocks are low-priced stocks ($1 or less) in companies whose future
operations are in doubt. “Boiler room” (illegal) sales operators have promoted some
penny stocks by cold calling unsophisticated investors on the telephone to stress how
much money they could make by buying these low-priced stocks. 
Foreign Stocks
Foreign stocks are stocks issued by companies outside the country of origin. Although
the U.S. stock markets still account for the largest market capitalization of all the stock
markets in the world, the foreign stock markets are growing in market share. Foreign
stocks provide you with the opportunity to earn greater returns and to diversify your
portfolio. You can buy foreign stocks directly in the foreign markets or buy American
depository receipts of the stocks of foreign companies.