Building Wealth With Stocks
The stock market is really the place to look if it's wealth that you want. If you are an intelligent investor with average resources, average willingness to take risks, and limited time to spend on active management of your portfolio, then it is safe to say that no other investment available delivers as well as stocks over the long run.
There are several categories of stocks to fit investors' goals. Sometimes the reasons for buying a particular kind of stock are obvious from the definition of the category.
Growth stocks have good prospects for growing faster than the economy or the stock market in general. Investors buy them because of their good record of earnings growth, and the expectation that they will continue to generate capital gains over the long haul.
Blue-chip stocks are a more loosely defined universe, including solid performers that could also be classified as growth stocks. Investors with an eye on the long-term and little tolerance for risk buy these stocks for their high quality. They tend to generate decent dividend income, some growth, and above all, safety and reliability.
Income stocks pay relatively high dividends and tend to raise them regularly. Electric utilities and banks often fall into this category, which is favored by retirees and others in need of a relatively high level of income from their stocks.
Cyclical stocks are called that because their fortunes tend to rise and fall with those of the economy at large - prospering when the business cycle is on the upswing, and suffering during recessions. Auto manufacturers are a prime example. Other industries whose profits are sensitive to the business cycle include airlines, steel, chemicals, and businesses dependent on home building.
Defensive stocks are theoretically insulated from the business cycle because people go right on buying their products and services in good times as well as bad. Utility companies fit here, as do companies that sell food, beverages and drugs. To maximize profits, you need to buy these stocks on the verge of an economic downturn, which requires an ability to predict that is rare even among the so-called experts.
Speculative stocks don't pass the usual tests of quality, but for some reason, they seem to attract investors anyway. They may be unproven young companies. They may be erratic or down-on-their-heels older companies exhibiting some sort of spark, such as the promise of an imminent technological breakthrough or perhaps a brilliant new chief executive. Most speculative stocks don't do well, so it takes big gains in a few in order to offset your losses in the many.
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There are several categories of stocks to fit investors' goals. Sometimes the reasons for buying a particular kind of stock are obvious from the definition of the category.
Growth stocks have good prospects for growing faster than the economy or the stock market in general. Investors buy them because of their good record of earnings growth, and the expectation that they will continue to generate capital gains over the long haul.
Blue-chip stocks are a more loosely defined universe, including solid performers that could also be classified as growth stocks. Investors with an eye on the long-term and little tolerance for risk buy these stocks for their high quality. They tend to generate decent dividend income, some growth, and above all, safety and reliability.
Income stocks pay relatively high dividends and tend to raise them regularly. Electric utilities and banks often fall into this category, which is favored by retirees and others in need of a relatively high level of income from their stocks.
Cyclical stocks are called that because their fortunes tend to rise and fall with those of the economy at large - prospering when the business cycle is on the upswing, and suffering during recessions. Auto manufacturers are a prime example. Other industries whose profits are sensitive to the business cycle include airlines, steel, chemicals, and businesses dependent on home building.
Defensive stocks are theoretically insulated from the business cycle because people go right on buying their products and services in good times as well as bad. Utility companies fit here, as do companies that sell food, beverages and drugs. To maximize profits, you need to buy these stocks on the verge of an economic downturn, which requires an ability to predict that is rare even among the so-called experts.
Speculative stocks don't pass the usual tests of quality, but for some reason, they seem to attract investors anyway. They may be unproven young companies. They may be erratic or down-on-their-heels older companies exhibiting some sort of spark, such as the promise of an imminent technological breakthrough or perhaps a brilliant new chief executive. Most speculative stocks don't do well, so it takes big gains in a few in order to offset your losses in the many.
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posted by Bob Moser at
8:03 PM
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