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Physician Investing Basics

 [By Julia O’Neal; MA, CPA]

There are several different types of common stock listed below, and more. 

Utilities: Utilities are companies in public-service businesses, such as electric utilities, natural gas delivery, or telephones, which pay high dividends and are often used by investors for income. 

Blue chips: These are high-quality, well-known, large-capitalization, dividend-paying companies with long track records of steady, secure earnings.  

Capitalization: Market price × Number of shares outstanding. Usually market cap of less than $500 million is considered “small capitalization,” but in recent years, companies between $500 million and $1 billion are also being considered “small caps.” 

Growth: Companies with earnings growth in excess of industry or market averages. Although these companies have strong earnings, they usually reinvest them into research or expansion rather than pay them out as dividends. 

Emerging growth: Smaller capitalization companies with even stronger earnings potential. Smaller companies are on the early part of the growth curve. While the start-up phase is the riskiest, the expansion phase follows, where growth is the fastest. Small companies may be in new businesses or new markets, and they often have the advantage of being able to react quickly to change. Some investors look especially for smaller companies that are “under-owned by institutions”—that have not been discovered by the big professional investors. 

Cyclical: Companies in businesses providing basic materials or products that are subject to the economic cycle; profits are based on increased consumer demand for high-cost items that can be deferred in tough economic times. Some examples are steel, autos, and building materials. These may be big, strong, mature companies that pay dividends, but they are not blue chips because the possibility exists that earnings may slump drastically and dividends may disappear during economic downturns. 

Defensive: Companies that continue to produce earnings in all economic cycles because they provide a necessary product or service (for example utilities, healthcare and food companies). 

Assessment 

Of course, stocks are further subdivided by industry type, from retailing (department stores and other direct sellers to consumers) to restaurants to technology to steel. The list is long, and sectors are often classified differently.

New areas, such as bio and nano-technology and networking software, are constantly being added. 

Conclusion 

And so, do you prefer common stocks, mutual funds, index funds or ETFs, and why?

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