There is a common misconception that companies and stocks perform the same, or that the stock represents the performance of the associated company. However, it is possible for a poor-performing company to produce stocks that are still good investments. Understanding these differences is important for becoming a successful trader.
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Growth Companies and Stocks
- Growth stocks are shares of businesses that are anticipated to grow faster than the market as a whole. These businesses, which are often in their early stages of development, reinvest their profits in order to spur further growth.
- Growth stocks typically do not pay dividends and may trade at a premium to other stock categories. Hence, growth stock investors tend to seek capital appreciation rather than income from their investments.
- Growth companies can be found in a variety of industries, including technology, healthcare, and e-commerce. While investing in growth companies can have the potential to produce sizable long-term gains, the risk involved can be higher due to the unpredictability surrounding those prospects.
Defensive Companies and Stocks
- A defensive company is more likely to persevere through a weak economy and has little business and financial risk to ensure earnings levels remain stable going forward.
- Defensive stocks have the ability to maintain their rate of return during an overall market decline. Their returns are unlikely to be impacted by a bearish market. This is why, during times of market turmoil, defensive stocks are sometimes regarded as a safe haven for investors.
- That being said, defensive stocks tend to offer lower returns than other types of stocks. Thus,they may not be the best choice for investors looking for high growth potential.
Cyclical Companies and Stocks
- Cyclical companies have sales and earnings which experience a high rate of change during different business cycles. They tend to do well during economic growth and perform poorly during economic downturns.
- Cyclical stocks see greater swings in their rates of return than the market as a whole. A cyclical stock typically has greater volatility than the market as a whole.
- Companies in the automotive, construction, and luxury goods industries are examples of cyclical businesses. These businesses typically have strong operating leverage, which means that even minor changes in sales can have a significant impact on their profitability.
Speculative Companies and Stocks
- Speculative companies are companies where their business activities require taking a great deal of risk financially. However, they have the ability to generate a great return on their assets.
- Speculative stocks are more likely to experience a low or negative growth together with a low probability of generating good rates of returns. These stocks are generally overvalued compared to the market.
- These companies are often in their early stages of growth, are frequently in emerging industries, and may lack a proven business plan, revenue stream, or profitability. Companies undergoing significant changes, such as restructuring, mergers and acquisitions, or regulatory changes, are also examples of speculative stocks.
A trader must first research the company before determining the worth of its stock in relation to the market price. The differences between different types of companies and stocks play a large role in determining whether or not a stock is a suitable investment.
If you are interested in trading shares and leveraging these differences into winning trades please feel free to contact our analyst, Ronald van Rensburg. You can also open a stocks trading account here, so that you do not further miss out on opportunities to make profits that are prevalent in the current markets. Try Tradeview Markets.
About the author:
Ronald van Rensburg
Analyst at Tradeview Markets
Email: rvrensburg@tvmarkets.com
