Monthly Archives: September 2013

Should I invest in growth or dividend stocks?

There are many different types of stocks on the financial market and this situation creates dilemma in potential investors – which type of stock investment is best for them. Should I invest in growth or dividend stocks? Which are the best penny stocks to watch?

This dilemma is often present when investors plan to invest in certain types of stocks that have many similarities like growth stocks and dividend stocks. Before we present their advantages and disadvantages let’s define these terms. Growth stocks are stocks of a company that has steady growth and whose profit is expected to rise in the future. This is especially the case with companies that are presenting new and interesting products and patents – hint: there are many hot penny stocks out there that fit this criteria.

Dividend stock is a broader term which can even include the growth stocks too, but this term is usually used for stocks from regular companies (no matter if they are showing constant progress, they have new products on the market etc.) and they are most often popular among investors who play safe and investors who expect long-term profit.

Probably the greatest advantage of growth stocks is the possibility of gaining large profit for relatively short period. Of course this type of stocks usually pays smaller dividends at first because the companies are reinvesting their earnings to improve their projects. However, once their capital project is over you can expect very high dividends and increased value.

Unlike growth stocks, dividend stocks are more or less predictable and you know what you can expect in the near future. They are usually bought by investors who are looking for a steady income source. With these stocks you can expect a stable passive source of income. You can also use the dividend to buy more stocks which will ultimately increase your income.

Growth stocks are usually very expensive and in some cases overvalued. It’s logical for companies that expect expansion or some breakthrough patent to have stocks at higher price. Dividend stocks cost less. Investors that look for these stocks hope that their value will rise because the market doesn’t recognize their real value.

Finally, the best penny stocks are more risky. They are suitable for investors that can deal with potential losses and those who have limited amount of money to invest should probably avoid them. Of course, investors who are not attracted by safety and smaller profit find them very attractive. Unlike growth stocks, dividend stocks are linked with companies that are already established and working steady for several years. They are satisfied with their size and don’t plan expansion which makes their stocks very safe. They don’t seek reinvestment and return part of their profit to the stock holders. Of course, this means that the gain for the stock holders is much lower.

Conclusion

Since the world economy is slowly getting out of the crisis investing in growth stocks is a good choice but it really depends on your ability to deal with unsuccessful investments. If you want to play safe settle with dividend stocks, if you have extra assets to invest go for growth stocks.