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Dipping your toe into the investment world is a lot less daunting once you understand some basic terms. Dividend stocks and growth stocks are two of the common ones you’ll run into. They’re both popular choices with investors, but they vary in terms of risk. While one type promises its owners regular returns, buying the other may end with a major payday or a major loss.
If you own dividend stocks, the company that sells them to you will routinely send you dividends, or a share of the company’s profits. Typically, dividends earned on these stocks are paid out quarterly. So if you owned 1000 shares of stock and the annualized dividend worked out to be 50 cents per share, or $500 per year, each year you would receive four payments of $125.
That’s just one example, though. Dividend stocks can be high-yield or low-yield, and there’s a lot of variation in how dividends are paid out. Payments are directly tied to the company’s success. Typically, only well-established companies pay dividends, which is why these stocks are often considered a safe risk.
A growth stock’s name tells you a lot about what it is. These are simply shares in companies that are growing and are projected to keep expanding at a rate that exceeds the industry average. They might have a patent on a new product or be revolutionizing an old industry – essentially, the hot new companies. Unsurprisingly, tech companies make up a significant chunk of growth stocks.
Growth stocks don’t pay dividends, so owners don’t get rewarded just for owning them. The goal with growth stocks is to turn a profit when you sell them. It’s a risky proposition because rapidly-growing companies sometimes collapse, taking their stock values with them.
Whether you invest in dividend stocks, growth stocks or both depends entirely on your risk tolerance and preferences. The former is generally the choice of more conservative planners. Dividend stocks are often owned by retirees, demonstrating how stable these stocks can be.
Growth stocks are less predictable. Even savvy investors sometimes lose money on them. That said, companies with failing growth stocks sometimes see those stocks bounce back, so owners are sometimes rewarded for their patience.