Blue Chip, OTC, NASDAQ, NYSE, S&P… What does it all mean?
There is a lot of industry jargon and acronyms to make the process seem complex. Let’s start to demystify things by starting with the different stock classes and see what might fit your investment strategy best.
Blue Chips
This is a term used to describe the stocks of high-quality and financially healthy companies. Companies that make up the Dow Jones 30 Industrials (DJI) index are the epitome of this categorization. This index is comprised of the 30 companies at the pinnacle of impact and strength in the US and the list changes over time. Currently, you will see names there like:
- Apple
- Amazon
- Microsoft
- Walmart
- JP Morgan Chase Bank
- Proctor & Gamble
- Coca Cola
- Home Depot
- McDonalds
- Nike
- IBM
- Intel
- Verizon
- Disney
- Chevron
Sampling of Down Jones Industrial Average Companies
These companies represent the most successful business of our time and you can buy shares in any of them, though the share prices can be in the hundreds of dollars per share. You can also invest in the Dow index, which gives you a diversified share across all of those 30 companies. SPDR Dow Jones Industrial Average ETF Trust (DIA) is the market leader in this space, but the expense ratio at 0.16% ($16 per $10,000 invested) is on the high side.
A similar index that expands the number of companies to the 500 top companies is the Standard and Poor’s 500 or S&P 500. This is the benchmark index used by most investors. If you can beat this index annually you are considered a savvy investor. Many beginning investors buy an Index Fund that tracks along with this index for simplicity. This is not a bad entry point, as it is, by definition diversified across many different business sectors. The top 3 funds in terms of total assets invested are:
| Fund | Dividend Yield (July 2024) | Total Assets (Billions) | Asset Manager | Expense Ratio |
|---|---|---|---|---|
| SPDR S&P 500 ETF Trust (SPY) | 1.27% | $537.8 | State Street Global Advisors | 0.095% $9.45 per $10,000 invested |
| iShares Core S&P 500 ETF (IVV) | 1.30% | $470.1 | BlackRock, Inc. | 0.03% $3 per $10,000 invested |
| Vanguard 500 Index Fund (VOO) | 1.32% | $462.7 | The Vanguard Group | 0.03% $3 per $10,000 invested |
Value Stocks
Value stocks are shares in a company whose share price is low relative to its fundamentals or overall value. These companies tend to be beyond the high growth mode and produce consistent earnings and profitability and instead of investing all profits back into the business, pay a dividend to the shareholders.
Common metrics value investors look for in their analysis are high dividends, high earnings-per-share (EPS), low price-to-book ratio (P/B), and low price-to-earnings ratios (P/E) compared to the overall market and within that company’s sector. Why are these metrics important? Because investors want to invest their money in companies that have solid foundations and are poised to succeed in almost any market condition.
Warren Buffet, Peter Lynch, and Kenneth Fisher are among the most famous Value Investors. They seek these companies because they have done an in-depth analysis of the company and not just a quick review of the statistics shown on an investment site. They research the leadership and the company vision to understand the business providing a likely glimpse into the future of the business.
Growth Stocks
Investing in growth stocks involves buying shares of companies that are expected to experience above-average earnings expansion compared to their peers. These stocks are typically characterized by their potential for significant capital appreciation rather than current income through dividends.
Growth stocks often belong to sectors such as technology, biotechnology, or e-commerce, where innovation and expansion drive rapid revenue increases. Investors are attracted to growth stocks because they offer the possibility of substantial returns if the companies succeed in scaling their operations and achieving their ambitious growth targets.
However, investing in growth stocks comes with a higher level of risk compared to more established, dividend-paying stocks. Because these companies often reinvest their earnings into expansion rather than paying dividends, they may not offer immediate financial stability. Additionally, the valuation of growth stocks can be highly speculative, leading to volatility and large swings in stock prices based on market sentiment and company performance. It’s crucial for investors to conduct thorough research and have a long-term perspective when investing in growth stocks, as their value is often driven by future potential rather than current financial metrics.
Penny Stocks / Over-the-Counter (OTC)
Penny stocks are shares of small companies that trade at very low prices, often below $5 per share. These stocks are typically listed on smaller exchanges or over-the-counter markets rather than major stock exchanges like the NYSE or NASDAQ. Due to their low price, penny stocks can offer the potential for significant gains if the company performs well. However, they are also associated with high risk and volatility.
The companies behind penny stocks are often young or struggling businesses, which can make their financial stability uncertain. Additionally, the low trading volumes and limited liquidity in the penny stock market can lead to dramatic price swings, making it a challenging environment for investors. Be careful of ‘Pump-and-Dump’ schemes where some ‘news’ or hot tip comes out to drive the demand up and the current holders sell off at a higher price and leave you with a stock not worth much.
Investing in penny stocks requires careful research and due diligence. Because these stocks are less regulated and often lack comprehensive financial reporting, it can be difficult to assess the true value and potential of the companies involved. This lack of transparency, combined with the speculative nature of penny stocks, makes them a common target for fraud and manipulation. Investors should be cautious and consider their risk tolerance before diving into the penny stock market, balancing the potential for high returns with the possibility of substantial losses.
International Stocks
Investing in international stocks offers U.S. investors the opportunity to diversify their portfolios beyond the domestic market and tap into the growth potential of emerging and established foreign economies. By purchasing shares in companies based outside the United States, investors can benefit from global economic trends and capitalize on sectors that may be underrepresented or booming internationally. For instance, while the U.S. market might focus on technology and consumer services, international markets might offer compelling opportunities in areas such as renewable energy, pharmaceuticals, or emerging markets with rapid economic growth.
However, investing in international stocks also comes with its own set of challenges. Currency risk is a significant factor, as fluctuations in exchange rates can impact the returns on foreign investments. Additionally, geopolitical events, varying regulatory environments, and differences in accounting standards can introduce complexities that require careful consideration. U.S. investors must also be aware of potential tax implications, as foreign investments might be subject to different taxation rules. Despite these challenges, with proper research and strategic planning, international stocks can be a valuable component of a diversified investment portfolio, offering exposure to global opportunities and the potential for enhanced returns.
Conclusion
This is a quick overview of the different stock classes in which you can invest and the characteristics of each.
All investments have inherent risk but stay tuned to learn more about how to invest in assets to minimize the risk of each asset class.
