Stocks investment - capital appreciation, income diversification, and risk

Stocks are actually excellent long-term performer. In fact, for the past century, no other investment has topped stocks. Stocks can provide income, capital appreciation, and diversification. They can give you a position in all the leading industries. Oil, gold, financial services, retail, automotive, medical, foods, transportation, corporate services - you name it, you can build a position in it in the stock market.

When you buy a stock, you become a part owner in a corporation. If you own shares of Microsoft, for instance, then Bill Gates works for you. When you are a shareholder in a company, as that company's fortunes rise, so will the value of your shares. But if the company's business sours and the sales plummet, your shares will dive in sync. Fortunately, over the long-term, stocks have generally enjoyed positive returns. But the risk is ever present.

Stocks are traded on one of several exchanges, including the New York Stock Exchange, the American Stock Exchange, the NASDAQ market, and the over-the-counter market used by the very smallest, newest companies.

You can buy or sell stocks any business day through any brokerage company, including full-service brokers, such as Merrill Lynch, discount brokers, and online brokerage companies. The market for stocks is very liquid. There are several categories of stocks. You can build a very diversified portfolio including income as well as capital appreciation across a broad range of industries. Here are the leading types of stocks:

1. Blue chips. Also known as large capitalization stocks, blue chips are typically well-known companies that are leaders in their industries, such as IBM, GM, Johnson &Johnson, and Wells Fargo. They are considered the safest stocks, although even blue chips can go through major market fluctuations. Blue chips generally pay dividends.
2. Small capitalization stocks. These tend to be smaller, newer companies on the way up. Many will struggle, particularly in a slow economy, but a few will break through and post outstanding returns, helping propel the stock price to new highs. On average, small stocks have outperformed blue chips by almost 2 percent per year over the past 70 years. But averages can be deceiving. You're definitely taking more chances with smaller stocks.
3. Midcap stocks. These are stocks of midsized companies on the way up. They are not household names like the blue chips, but they are larger and more established than the small-cap stocks. They typically have slightly better growth potential than the blue chips, but not quite the home run potential of small stocks.
4. Income stocks. Stocks that pay good dividends are referred to as income stocks. Utility stocks, such as gas and electric companies, are among the favorites of income stock investors. Like most income oriented stocks, utility stocks don't offer much capital appreciation potential, but they do pay excellent dividends, and those dividends tend to go up a little bit each year. A well-diversified portfolio should have both growth and income stocks. Retired individuals often increase their portion of income stocks to provide additional income to supplement their other retirement income. In addition to utilities, other types of stocks that tend to pay the best dividends would include banks, insurance companies, certain investment companies, tobacco stocks, real estate investment trusts, and energy services companies. As a point of comparison, in recent years, most blue chip stocks were paying dividends of about 1 to 2 percent, banks were paying savings account interest rates of about 2.5 percent, and the better-yielding income stocks were paying dividends of about 3 to 10 percent.
5. Foreign stocks. A number of major foreign stocks also trade in the United States on the New York Stock Exchange and other markets. Nearly 1000 foreign stocks trade here as "American Depository Receipts" (ADRS). By buying stocks from outside the United States, you spread your risks and become less reliant on the U.S. economy. However, an easier way to invest in foreign stocks - and the preferred way for most investors - would be to buy an international stock mutual fund.
6. Preferred stock. Preferred stock is similar to a bond in that it pays a fixed dividend that is set when the stock is issued. Not to be confused with convertible securities, preferred stocks do not offer much price appreciation potential, nor do they raise their dividends from year to year as many common stocks do. The one advantage of preferred stock is that, should the company be liquidated, preferred shareholders would have claims satisfied before common shareholders. However, preferred stock is not an investment that would be suitable for most investors.
7. Value stocks. Value investors look for bargains in the stock market - stocks they consider to be undervalued compared with the rest of the stocks in the market. There are value stocks of every size and industry. The key for value investors is finding stocks that are trading at a very low price relative to the value of their assets or their earnings. Value investors take some chances buying low-priced stocks that the market has shunned in hopes that those stock will soon find favor in the market and begin moving up.
8. New issues. Known as IPOs (initial public offerings), new issues are one of the riskiest areas of the stock market. New issues tend to be very speculative because they often have new products or services that are still earning market share. New issues can enjoy explosive growth, but there are many more busts than booms in the IPO market.
9. Cyclical stocks. Some industries do better during specific stages of the economy, such as automakers, paper, chemical, steel, and aluminum manufacturers. Because they face high fixed costs of operation, these companies do best when the economy is strong, and their production engine is at full tilt. But they suffer when the economy slows down because they still face high costs due to the overhead of factories, machinery, and a large workforce. The best time to buy cyclical stocks is at the bottom of a recession when their price is down and their earnings are down but no longer declining. The best time to sell a cyclical stock is during an economic expansion when the company is producing at full capacity. After that, there is little room for further growth. And once the economy hits the next phase - the slowdown - the stock price could decline.