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Different Types of Stock in A Portfolio
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For Different Investing Strategies
There are various types of stock available in stock market.
Depending on your investing and trading strategies, you can make money from all these stocks.
However, different stocks require different strategies. Learn the stocks' characteristic very carefully so that you apply the correct strategy.
Income Types of Stock
Income stocks are normally from high dividend yield stock which has excellent history of paying dividend consistently to its shareholders. The company is able to pay dividends since it has stable operation, consistent profits and require not so much reinvestment program. Most probably, the stock had grown so big until it unable to offer any more growth opportunities in near future.
As a result, the company's board of directors prefer to distribute the excess cash as dividend to maintain the stock attractiveness among the investors.
This can happen if the money is reinvested in the business operation unable to give enough return to its shareholders. For example, there is no point of reinvesting the excess cash if the company only able to generate 3 per cent return, which is better to put it in cash deposit (zero risk investment).
Usually, income or known as dividend stocks have these properties:
- High Dividend Yield (DY), about 3-5%: I don't think it needs further explanation right? ;)
- High Return on Equity (ROE), about 12-20%: By giving out the excess cash, the number of retained earnings would be less; and so does ROE.
- Medium Earnings Per Share Growth Rate (EPSGR), about 5-10%: Its size is so big that made them difficult to grow at higher rate.
- Low Debt to Equity (D/E), subject to industry: Because the company's earnings enough to be reinvested.
Growth Types of Stock
Growth stocks have the ability to grow at super-fast rate. If i said super-fast, it is really fast. Talking about 30-50% annual return! So how they did that?There are many occasions can be contributed to the company's earnings. Firstly, the company can be small in size. As a result, an increase earnings to $500,000 from $250,000 is good enough to give 100% return to its shareholders.
Secondly, even though the company is small in size, it can grow super-fast if it operates in super-niche market. It is so niche that none of the big player can reach that profitable market. Last but not least, the business may be riding on new bullish trend. For example during the dot-com era where all IT related companies' share price increase by 1000% in no time!
Hot growth stocks can be so attractive, but watch out these warnings though:
- Too Much Debt: Nothing wrong with borrowing money to make money, but borrowing too much is not too good as well. The company can suffer from high interest rate if the is recession happens.
- Growing Sales but not Earnings: This indicates the company is pushing for sales too hard but not conduct its operation effectively. As a result, its profit margin will become less.
- Growing Earnings but not Cash Flow: This happens if the company is allowing customer to buy on credits too much. It shows that the company is very weak in collecting payments from customers.
Speculative Types of StockSpeculative stocks can be too dangerous. Nevertheless, these types of stock attract many investors and traders attention since they offer quick cash and fast gain. Why is that?
Because it involves penny stock investing most of the time.Penny stock is relatively very cheap in price, below $5, or as low as $0.10 per share, or even lower! Thus increase by $1 in one week at least is equivalent to 85 per cent return per month or 1020 per cent per year!
Just imagine how fast you can get rich from stock market!However, as penny stocks are normally involve small-cap companies, the risk for the company to go bankrupt is there. In fact, the risk is high.
Therefore, use your wise judgement to carefully select good companies that have great management.
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Ever wonder how to make money in stock market? You have the money but don't know how? Find out ways to make money from stock market here.
If you pick good stock, you can become financially free during your retirement. These 3 simple tips will help you to get there.
Discover my simple but profitable stock screening criteria. It is proven to be a good stock pick strategy for all stock investors.