Series 7
Risk and Tax Considerations - Stock Classification Risks
You can also look at the different types of risk in terms of how each applies to different stock classifications:
- Growth Stock
- A growth stock generates a higher rate of return than others in the market; it can also be described as a stock that is expected consistently to provide returns in excess of the company's cost of capital.
- Growth stock are also sensitive to increases in interest rates and inflation because these drive up the cost of capital, and growth stocks, by definition, must exceed these hurdles.
- In addition, growth stocks are sensitive to capital, timing, market, political and currency risks.
- Speculative Stock
- A speculative stock is one that appears overpriced compared to how other stocks in the market are valued.
- Specualtive stocks might be thinly traded and might not even be listed on an exchange, so liquidity risk is a consideration.
- In addition, speculative stocks are sensitive to capital, timing, market, political and currency risks.
- Defensive Stock
- A defensive stock is not expected to lose its value as quickly as others during a bear market.
- As a result, defensive stock are safe havens during economic downturns since they hold their own during bear markets.
- In fact, as more investment dollars search for fewer dependable securities, a defensive stock might actually rise as other sectors fall.
- Defensive stocks also tend to have higher dividends to pay out - or miss - and are thus are sensitive to credit risk.
- In addition, defensive stocks are sensitive to capital, timing, and currency risks.
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