Common Stock - Types of Common Stocks

Part 2: Types of Common Stocks

In Part 1 of Common Stock, we saw that stock represents an equity share, or ownership, in a company. We also discussed some of the advantages and disadvantages of owning common stock. Let’s continue by looking at the various types of common stock that are available:

  • Blue chips - Blue chips refers to the stock offerings of the country’s largest and most prestigious companies. Due to their already large size and market share, these companies sometimes don’t have the potential for further substantial internal growth. On the other hand, they won’t be going out of business anytime soon. They are considered to be relatively low-risk, low-reward investments. They rarely have to raise additional capital, and they usually generate excess cash. As a result, blue chip companies generally pay dividends to their shareholders.
  • Utilities - These are the stocks issued by power and water companies. They usually have limited competition, and as such, enjoy somewhat monopolistic conditions. For example, most homeowners have only one choice from which to purchase their power services. Because of these prevailing conditions, utilities are considered low-risk investments. They’re also closely regulated with regard to the prices that they are allowed to charge for their services and the return which they are allowed to earn. Thus, they also offer a fairly low reward. But like blue chip companies, they are generally considered to be very stable and safe investments. Most utilities distribute a relatively high percentage of their earnings in the form of dividends.
  • Established growth - These companies are large enough to be well-established and even well-known, but are small enough to still have the possibility of substantial future growth. They’re usually currently profitable, but may need to raise additional capital to sustain their growth. The earnings that these companies generate are usually reinvested for further expansion and, as a result, they don’t usually pay dividends to their shareholders. However, the shareholders do often reap benefits in the form of capital gains.
  • Emerging growth - Emerging growth companies are relatively small and have the potential for substantial future growth. These companies will generally need to raise additional capital to support their growth and expansion. They, therefore, will not pay dividends. Many times they can offer very attractive returns but they also have additional risk. This can often be attributed to the fact that successful management of rapid corporate growth and its inherent risks can be very challenging and complicated, and many management teams may not quite be suited for the task.
  • Penny stocks - These are by far the most speculative. They generally trade for less than $5 per share. These stocks represent ownership in companies which may still be in the research and development stage of their first product. They may also be offerings of companies that have suffered severe financial setbacks and are barely surviving. While almost always losing money, they carry a great deal of risk, and they tend to be very illiquid. There is generally a high failure rate among these companies.

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