Stock Characteristics

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Companies, like almost anything else, are available for purchase and sale. Your daily newspaper certainly covers the more noteworthy purchases such as AOL's recent purchase of Time Warner. In addition, however, and on a much smaller scale, individuals can purchase a franchise restaurant like McDonald's, a small bed and breakfast , or the local corner store. Even professional practices such as a dentistry or professional massage parlor are usually sold when the proprietor retires or leaves the profession. As these businesses vary, so does the accompanying stock. Over the years , investors have come up with descriptive names to characterize the differences between these stocks.

This is not meant to imply that all stocks bear little resemblance to each other. In fact, stocks actually tend to be more similar in most aspects. For example, all horses are basically the same ”four legs, one mane, and so on. A race horse, however, varies from a plow horse primarily because of what the owner expects from it, namely a race horse will try to win races and a plow horse will pull a plow. As a result, the horses would differ in what they would be fed, what kinds of ailments would be more common to each, and how they would be treated.

So, too, most stocks have particular aims that define them. One stock may attempt to provide higher dividends , while another may focus on higher capital gains, and yet another may focus on raising quick money for the issuing company immediately. Due to these differing focuses, companies will treat their stocks accordingly in order to maximize the stock's ability to meet their goals.

Goals are usually determined when a stock is first issued by the company in what is known as an initial public offering. This is nothing more than a descriptive name for the first time a stock is available for sale. It is also known as a company "going public," which, as the name implies, means that portions of the company, or shares of stock, are now available for the public to purchase. The decision to "go public" and what the aims of the stock will be are pretty much determined by the board of directors or whoever the owner of the business was before it went public. Let me point out that these decisions are fluid and please note that many companies do not go public at all. Many are owned by a person or a family that keeps them in tight control. No company is ever required to go public.

You, as an investor, have the responsibility to determine what use you want to make of the stock, your goal in purchasing the stock, and which kind of stock would most likely fulfill your goal.

The following classifications are not official and are not determined by any governing body. They are also not set in stone ”what is considered an income stock to one may be considered a penny stock to another. Like many industry terms, these are fluid, intended to cover as many angles as possible. For example, when gambling, no set size bet actually constitutes a high roller . What constitutes a fortune to one person is but a drop in the hat to the next . So too, these terms are not meant to imply anything definitive, but rather to be used as an aid when discussing and studying stock.

Blue Chip Stocks

Blue chip stocks are stocks in companies that historically have exhibited unparalleled and unquestionable strength; such companies are the stalwarts of American business. Stocks of this type include companies such as IBM, AT&T, and General Motors. These are the stocks whose long- term success is guaranteed . These are not stocks in any one particular industry, computers for example, but rather the most stable and solid stocks on the market regardless of the products they produce or services they offer. The focus here is on the behavior of the stock.

For example, IBM and General Motors produce vastly different products but, regardless of their production, the stocks of both are very stable as the companies are such behemoths that very little can cause their corresponding stock to fluctuate much. As a general rule, these companies tend to have been in business a very long time, although Intel, for example, is considered a blue chip stock and has been in business a short time, relatively speaking.

Blue chips almost guarantee that novice investors will not lose money while enabling them to learn and practice their investment strategies with real stock. In addition, blue chip profits are based on investors purchasing the stock and holding on to it for an extended period of time, a highly desirable strategy for novice investors.

Secondary Stocks

Secondary stocks are still up there in investor confidence ”they simply are not in the blue chip league. The easiest distinction of this is through a complicated financial area known as market capitalization by which financiers determine how much money would be required to bring such a company to the market today. This is often determined by what the company actually came to the market with, regardless of when it happened . Suffice it to say for our purposes that stocks of this type still include well-established companies such as BancOne (finance), Teledyne (technology), and Best Foods (food service). Even though the chances are slim that these companies will go out of business, secondary stocks do tend to be a little more volatile ”meaning the price fluctuates more ”than blue chip stock. This could be due to any number of reasons, not the least being that these companies as a general rule are smaller than blue chips and/or do not have as established a reputation.

Plain English

Secondary stocks are shares of companies that have been brought to the market with a significant amount of investor's money. The amount of money is known as "market capitalization." The market capitalization is quite large, but still less than that of companies whose stock is considered blue chip.

Income Stocks

Income stocks are stocks in companies that are usually fairly well established and that make a relatively regular amount of profit. Income stocks generally have a solid history of making regular dividend payments. This does not mean that these companies never reinvest their profits; however, providing dividends is more important, so reinvestment will usually be a small percentage of the profit if it exists at all. Investors will usually buy this type of stock because they wish to receive regular dividend payments. As a result of all this regularity, there's usually very little volatility involved in the value of these stocks. Examples of these types of stock include Bell Atlantic (communications), Con-Ed (utilities) and General Electric (utilities). As you can see from these examples, these industries tend to receive regular payments from their customers as opposed to industries such as retail stores where income could vary significantly.

Plain English

Income stocks are stocks that are usually characterized by the issuing company's focus on providing higher dividends as opposed to reinvesting its profits in further growing the business to provide capital gains.

Growth Stocks

Growth stocks are stocks that are being valued on their potential, as in the Widget company/apple freeze example in Lesson 4, "What Is a Stock?" Investors usually bet that the companies will become successful as a result of a great product or service or capable management rather than something as dramatic and unpredictable as a crop frost . Growth stocks typically put all the profits they make back into growing the business, so investors buy this stock because they believe the value of the stock will go up as opposed to buying the stock for the purpose of receiving regular or substantial dividend payments. Companies with this type of stock include EMC (computer technology), AOL (Internet service provider), and Wal-Mart (retail sales). Investors who purchase this type of stock usually plan to make their profits by selling the stock for more than they bought it for. It is important then to push growth stock of those companies you believe will ultimately prove successful.

TIP

Because growth stocks also best operate on the strategy of buy and hold, these too are an excellent stock for novice investors to consider. Be aware, however, that as growth stocks have (and plan) to grow considerably faster than blue chip stocks, so too do the opportunities for loss.

Penny Stocks

Penny stocks are stocks for the high rollers, because they usually don't have much that is substantial to offer investors other than their potential. Penny stock investors are usually investors who are hoping to buy the stock before the rest of the world catches on to what a great deal it's going to become. Penny stock prices are, for that very reason, extremely volatile. Examples of penny stocks are difficult to name, as quite frankly few stick around long enough to be of any notice. If you are absolutely determined to find some, look at the "Over the Counter" listing in The Wall Street Journal. Any stocks priced under $10 per share are considered penny stocks.

Please notice that no examples were provided in the description of penny stocks. This is because penny stocks make themselves highly attractive to new investors through their lower prices (generally under $10). As a result, newer investors often purchase these stocks without considering the fact that (quite frankly) most people lose whatever money they have invested.

Table Stock Class Quick Reference

Stock Type	Example 1	Example 2	Example 3
Blue chip	IBM	GM	AT&T
Secondary	Teledyne	BancOne	Best Foods
Income	Bell Atlantic	General Electric	Con-Ed(ison)
Growth	Wal-Mart	AOL	EMC
Penny	Somanetics Corp.	Explorer Technologies, Inc.	Amistar Corp.

The 30-Second Recap

Blue chip stocks are the most stable of all stocks in price fluctuation.
Secondary stocks are also high in investor confidence but are differentiated from blue chips in that they have a lower market capitalization.
Income stocks are those whose primary focus is to provide regular and higher dividend payments.
Growth stocks are stocks that pay little if any dividends, choosing instead to increase capital gains by reinvesting profits to grow the business.
Penny stocks are characterized by their low prices and extreme price fluctuations, best avoided by novice investors.

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