to help them live more comfortably now and for the rest of their lives. They might, for example,choose to invest in vehicles that pay regular dividends rather than those that reinvest theirearnings. dividends. As a result, income stocks tend to offer a higher than average dividend yield.• Growth stocks—Investors typically buy growth stocks for capital appreciation. Since mostgrowth companies use their current earnings to finance future growth and ongoing research, most—if not all—of their earnings are reinvested back into the company. While growth stocks areusually bought for their price appreciation potential, they may pay out a small portion of earningsin the form of shareholder dividends.• Blue-chip stocks—Blue-chip stocks refer to the most secure and most highly rated commonstocks available. They are typically issued by larger, well-established companies that have theproven ability to pay steady dividends in both good and bad years. These companies are usuallyleaders in industries that tend to be less vulnerable to cyclical market swings.• Cyclical stocks—Companies whose earnings tend to fluctuate sharply with their businesscycles are issuers of cyclical stocks. When business conditions are good, a cyclical company’sprofitability tends to be high and the price of its common stock tends to rise. When conditionsdeteriorate, the company’s sales and profits often fall sharply and/or rapidly. The timing of aninvestment in cyclical stocks is therefore very important.
• Speculative stocks—Speculative stocks carry greater risks—but offer the potential for higherreturns. These stocks typically trade at a high price relative to the company’s earnings (they havea high price/earnings, or P/E ratio) and are characterized by greater price swings than other, lessvolatile stocks.Preferred StocksAs with common stock, preferred stock also represents ownership in a corporation, and is subjectto changes in market value. In contrast to common stock dividends, which change as corporateearnings fluctuate, preferred stock typically pays a predetermined, fixed dividend on a quarterlybasis. Both common and preferred shareholders receive a dividend only after it has been earnedand declared by the company. However, preferred shareholders receive priority and are paiddividends before common shareholders. If a company is liquidated, preferred shareholdersreceive priority over common shareholders in the distribution of assets. However, unlikecommon stock, most preferred stocks don’t carry voting privileges. Employee Stock PlansMany companies allow eligible employees to invest in company stock through their employer bymeans of employee stock bonus plans, employee stock ownership plans, employee stock optionplans and/or employee stock purchase plans. Employees who choose to participate in these planscan essentially become part-owners and may benefit from the company’s long-term growth andprofitability.Types of Employee Stock Plans• An employee stock bonus plan is maintained by an employer to provide benefits similar to