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Understanding Stocks

Radio Transcript, 2 minutes 30 seconds, for use during week of September 24.

Description: Penny and Ira discuss different types of stocks--income, growth, value, cyclical, etc.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Ira: Penny, I’ve taken a look at my investments and I understand that I need a mix of stocks, bonds, cash, and maybe other asset categories .

Penny: That’s right, Ira. And your asset allocation might be different from mine because our goals are different.

Ira: You’ve also said there are differences within a category as well. Just what did you mean?

Penny: Yes.  For example, while stocks in general are riskier than investing in bonds, you’ll also find some stocks that are less risky than average and some that are more risky.

Ira: So . . . How do I decide which stocks are right for me?

Penny: Let’s look at some different types of stocks.  There are income stocks, which are those stocks that regularly pay a high percentage of earnings as dividends.  These are stocks that you can hold and be less concerned about market ups and downs.

Ira: So, income stocks tend to have less risk?

Penny: Yes. They tend to be of low or moderate risk, whereas growth stocks are those that have shown relatively fast growth in earnings, causing their prices to rise. 

Ira: So, growth stocks would be riskier?

Penny: Yes.  Typically growth companies are in new or fast-growing industries and will show more volatility.  Investors generally hope to make large capital gains with these stocks over the long run.

Ira: Okay, income stocks, which pay dividends and growth stocks which are riskier and generally don’t pay dividends.  Are there other types?

Penny: Several.  Value stocks have relatively low prices compared to their historical earnings and the value of the company’s assets.  Cyclical stocks tend to rise and fall with the economy.  And speculative stocks are those of start-up companies or companies that have lost much of their value and may or may not recover.

Ira: So, speculative stocks would have a lot of risk?

Penny: Yes.  And cyclical stocks would change as the economy in that particular sector changes.

Ira: Penny, you’ve given me a lot to think about.  Since I’m retired and have a small pension it seems to me I should concentrate on income stocks . . . to supplement my income.

Penny: That makes a lot of sense to me, Ira.  And remember, for more information, visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated September 24, 2007