For the most part, investors that are interested in stocks fall into two main categories:
- Buy low and sell it high for capital appreciation
- Buy and hold it for dividends, creating a source of steady income
There are stocks available that fulfil each objective, and there are also stocks that provide a mixture of the two objectives.
However, stocks are commonly classified into three main categories: dividend stocks, value stocks, and growth stocks.
Dividend Stocks
While it is definitely not your solution to become a millionaire overnight, dividend (or income) stocks are known for their steady stream of income.
If you are looking for a safe yet steady source of investment, dividend stocks are your go-to!
A typical dividend stock belongs to a stable and mature company with high dividend yields. While profits for growth and value stocks are only realised when you sell them, dividend stocks offer a way for investors to draw regular income from their investments without having to sell them.
However, it is important to note that dividends are not compulsory, and that it is entirely up to the company whether they do want to pay out dividends.
Value Stocks
You might not be familiar with the term value stocks, but all it actually means is to seek out underpriced stocks and sell them when the market values them at the appropriate amount again.
Value stocks typically belong to smaller companies due to the higher potential it has to see a large increase in share price. These companies are usually undervalued due to relatively lower ratios, for whatever reasons. It is important to find out the underlying reasons; Are they due to financial difficulties nearing the end of the financial year, or are they due to negative public sentiments?
In essence, value stocks refer to stocks that are cheap without any reason.
Value stocks are more for people who have a longer investment horizon as it will take time for the problems to be resolved and for the stock to restore to its original value.
Growth Stocks
This is the most suited for people who are looking to profit from a huge capital gain instead of a steady stream of income.
The difference with value stocks is that growth stocks are not undervalued, but are simply just those with the potential for massive share price gains in the future.
Growth stock companies are known for their… wait for it… growth (well… quite the joke don’t you think?). The reason for this higher growth is due to the fact that they don’t pay dividends out, but instead reinvest all its earnings back into the business for growth.
Typically, these companies have products or services that have a huge potential coupled with effective business models that allows them to capture market demand.
Of the three categories of stocks, growth stocks tend to be the riskiest, and it is important that you research all information with regards to the company before making any decision. As the saying goes, “with high risks, comes high returns”, and this is exactly why the growth potential of these stocks are virtually limitless.
Summary
Stocks are a means of generating returns, regardless through capital appreciation or dividend inflow. Each of the three categories has its pros and cons, and a well-balanced portfolio should ideally consist of all three, from various industries.
As long as you do your due diligence and research, you can choose whichever stocks that are in line with your investment strategy and beliefs.
