I OWN THAT COMPANY!
investors are drawn to them. These companies are known for being financially stable and distributing dividends in both good and bad years. They are usually leaders in their industries or industry seg- ments. All 30 companies that make up the Dow Jones Industrials are classified as blue chip stocks, as well as other utility companies and large, consistently successful companies.
ALUE STOCKS. Companies whose stock is considered underval- ued (trading at a price lower than expected) fall under this heading. The stock may be undervalued because of inner company strife (management change, etc.), business operations restructuring, or perhaps that particular industry is currently unpopular. Generally, value stocks have a lower price-per-earnings ratio than growth stocks do, and thus, their price per share is lower.
Many times a value stock may be reclassified as a growth stock. Although growth stocks have dramatically outperformed value stocks in certain years, over time, the returns of value stocks have surpassed those of growth stocks.
GROWTH STOCKS. These are companies that are expected to have dramatic growth rates in business and/or earnings. Generally, stock of companies that are emerging or very young would be considered growth stocks. These companies tend to reinvest their earnings, rather than distributing them to stockholders, to help them increase their business. Therefore, the only income stockholders would see from growth stocks would come in the form of stock appreciation at the time of sale. Growth stocks are also a riskier investment than blue chip or value stocks. Their share prices usually increases much faster than those of blue chips or value stocks, making their potential for appreciation very great. However, the share prices are just as likely to decrease very quickly. Growth stocks also tend to do poorly in down market times.
Depending on your risk tolerance, objectives, and time frame, growth stocks may not be appropriate for your portfolio. If you are willing to assume the risk associated with growth stocks and are investing for long-term potential growth and appreciation, then growth stocks may be a good fit for you.