Blue-Chip, Income, Growth, and Preferred Stocks
Blue chips are considered to be the most prestigious, well-established companies that are publicly traded, many of which have practically become household names. Included in this mostly large-cap mix are General Electric (which trades on the NYSE under the symbol GE), McDonald's (NYSE: MCD), and Wal-Mart (NYSE: WMT). A good number of blue-chip companies have been in existence for more than twenty-five years and are still leading the pack in their respective industries. Since most of these organizations have a solid track record, they are good investment vehicles for individuals leaning to the conservative side in their stock picks.
Growth stocks, as you can probably guess from the name, include companies that have strong growth potential. Many companies in this category have sales, earnings, and market share that are growing faster than the overall economy. Such stocks usually represent companies that are big on research and development; for example, pioneers in new technologies are often growth-stock companies. Earnings in these companies are usually put right back into the business, rather than paid out to shareholders as dividends.
If you had purchased 100 shares of Wal-Mart in January of 1990, you would have paid $533. By January 1995, your investment would have been worth $1,144 — more than 100 percent profit. And by January 2008, your investment would have been worth $5,074, almost ten times more than your original purchase price.
Growth stocks may be riskier than their blue-chip counterparts, but in many cases you may also reap greater rewards. Generally speaking, growth stocks perform best during bull markets, while value stocks perform best during bear markets, but that's not guaranteed. A word of caution: Beware of stocks whose price seems to be growing faster than would make sense. Sometimes momentum traders will help run growth-stock prices to skyscraping levels, then sell them off causing the stock to plummet.
Income stocks do just what the name suggests, provide steady income streams for investors. These shares come with regular dividend payments, sometimes big enough that people can actually live off their dividend checks. Though many income stocks fall into the blue-chip category, other types of stocks (like value stocks) may offer consistent dividend payments as well. These stocks make a good addition to fixed-income portfolios, as they also provide the opportunity for share-price growth.
Preferred stocks have almost as much in common with bonds as they do with common stock. Essentially, this type of stock comes with a redemption date and a fixed dividend that gets paid regardless of the company's earnings. If the corporation has financial difficulties, holders of preferred stock have priority when it comes to dividend payments. In times of prosperity, some preferred shares (called participating preferred) may get a second dividend payout that is based on earnings. As the owner of preferred stock, you normally don't have the rights that come with common stock ownership (like voting). However, preferred stock can be a good portfolio addition for income-oriented investors.