Last time Ruramai and I shared with you the types of stocks available. We promised we would come back with a second edition to increase your knowledge of stocks. Take your time and go through this article, your knowledge of stocks will never be the same.
Growth stocks are stocks whose price is rapidly appreciating. It is the stock of a company that generates substantial and sustainable cash flows and whose revenue and earnings are expected to increase at a faster rate than an average company in the same industry. These are companies and industries whose products are always increasing in demand, the likes of education, telecommunications, and technology. Having an edge over the market (competitive advantage), companies that have new product inventions, discovered new markets, and patent rights, stocks of these companies tend to be growth stocks. Growth stocks provide gains to investors in the long run at a higher risk due to price volatility.
Investors seeking to create wealth can invest in high growth stocks but should expect to realize gains in the long run. High growth shares usually depend on the company’s innovation thus companies that are innovative tend to have high growth rate. Typical growth stock companies retain most of their earning hence they do not pay a dividend, if they do pay it is usually small because the companies are working on expansion opportunities. Young investors should invest in growth stocks since the value of the stock increases overtime.
These are also known as small cap stocks or micro-cap stocks and they are usually associated with the small companies.Market capitalisation is how the market values a company,it is the price of the stock multiplied with the number of shares of that particular company.The common definition of small caps would be any stock that trades for less than US$5 according to the U.S Securities Exchange Commission (SEC). This definition however does not cater for other exchanges as prices differ from exchange to exchange. On the Zimbabwe Stock Exchange (ZSE) they have the small cap index which generally caters for these penny stocks. Using the current exchange rate all companies on the ZSE are currently trading for less than US$5, but this does not mean all stocks are penny stocks. This is why there is a small cap index on the ZSE to cater for the penny stocks on this exchange.
Penny stocks have a high level of volatility that means investors with a high level of risk tolerance are attracted by them. There is a very high potential of good returns from penny stocks as well as a high risk of losing an investment. Penny stocks are a high-risk investment option but at the same time the trading volumes are significantly lower.Since these are small companies there is a very high chance of the stock price going up and also a very high chance of the companies failing. Penny stocks have to be traded with caution otherwise if you’re only attracted by their low price without doing your research, you might end up losing your investments. These stocks are highly illiquid in the short term so it is profitable to invest in them for the long term. In this case the saying, the bigger the risk the bigger the return is not entirely true, always have a balanced portfolio so that a setback in penny stocks for example will be absorbed by a blue-chip stock.
These are stocks that regularly pay out dividends to investors, the companies are usually well established with a good record of distributing their earnings back to their shareholders. These companies are usually well managed because the company knows it has to pay dividends to its investors quite often throughout the year. The stock prices of these companies do not really provide much room for percentage gains but they are stable as compared to those of other companies.
Investors benefit from dividends as it is money in hand whilst they still hold on to the stocks they currently own. Investors that need a regular cash flow, pensioners and unemployed investors make the bulk of investors in dividend stocks. However, since the profits are being used to pay dividends, this means there is less money going into the growth and expansion of the company. Companies that are growing and expanding means the stock price will also appreciate over time.
Now that as an investor you know the types of stocks, your goal is to now select the stocks that satisfy your investment hunger. Make sure to choose the stocks that are aligned with your goals. If you can’t do that alone meet up with your financial adviser, at least now you understand the language when they speak. Always remember to keep a balanced portfolio when you invest, too much of a certain type of stock will do more harm the good if things do not go your way.