I came across an article this week that shed light on the “alphabet soup of stocks.” Many stocks can be broken into categories that denote how they perform during various times of the year or business cycle periods. There are also slang terms that are used in the financial industry to describe and categorize stocks. After knowing more about this language, you will be able to watch financial TV or read financial papers with more clarity and less confusion.
Stocks that are categorized based on how they perform during various times of the year are seasonal and non-seasonal stocks. Seasonal stocks are characterized by the different demand levels they face throughout the year. An example of a seasonal effect on a stock is the increase in retail sales during the holidays. In contrast, non-seasonal stocks are those that are not affected by the change of seasons, such as companies that produce or sell goods in which demand is not affected by the weather or holidays.
Cyclical stocks involve companies whose business activities intensely follow the economy’s business cycles. The products of these companies share this relationship with the economy. Examples are car manufacturers or airline companies. In contrast, non-cyclical stocks have profits that do not change readily with the business cycle. These companies are ones that provide us with essentials, such as healthcare and food.
Some stock slang terms that aren’t always intuitive, but are useful to know, are blue chip and penny stock. Blue chip stocks are those of companies that are market leaders, and have proven their ability to survive through both good times and bad. Examples of blue chip stocks are General Electric and Wal-Mart. These stocks are generally expensive, but can be safe bets. Penny stocks trade for less than a dollar, or are stocks that are generally new to the market with no reputation.
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