Investments are one of the best ways to reduce tax bills while gaining profits on the other side. However, with so many investment options in the market today, it has become crucial for people to dig deep into the subject a little further to gather specific information before investing.
People’s interests and goals play along with the investment options. The more specific people become about their investment goals and interests, the better the investments can be. So, the person’s interests and investment options should align for a successful investment journey.
And Income and Growth stocks are among those securities travelling with the same motto, benefit the investor at any cost. But then the question arises, Why should a person invest in these stocks while there are other options?
What are Income Stocks?
The stocks that pay their investors regularly in dividends are known as income stocks. Income stocks are more likely to face less volatility with high yields. At the same time, the other form of securities struggles to recover the market in the conditions like inflation, interest rates, political upheaval, exchange rate fluctuations, current events, and natural calamities. Income stocks greatly depend on the company issuing the stocks.
Most of the income stocks in the market get issued by large-cap companies, which are worth 10 billion US dollars in the marketplace. Since these companies are already popular, they will not get affected by the stock market surge. To make investors happy, companies pay investors each year as a bonus in dividend form.
The Top 4 features that impact Income Stocks:
Every type of stock has its significance in the marketplace. Similarly, the benefits of income stocks include:
1. Dividend Payments:
As said above, one of the best features of income stocks is that they pay regularly. And these stocks tend to beat inflation as companies increase their dividends with time. An act of regular payouts makes investors more confident about the company’s growth and its commitment to the shareholders, which helps to attract more investors and investments that will tend to stay invested longer.
Some companies pay dividends in cash directly to the investor’s bank account, while others add additional stocks to the investor’s portfolio. However, it is totally up to the investor to accept dividends in whatever way they are comfortable with. But, in the case of additional stocks, the investors must wait for stocks to turn in market surge conditions.
2. Lower Risk:
Income stocks are much safer compared with the other form of securities in the market today. As said above, the income stocks are from large-cap companies, and the risk of losing money will be less. Since these companies are notable and famous, they care more about their reputation in the market. Hence, even in volatile conditions, they pay dividends to their existing investors.
3. Interest Rates:
As market fluctuations do not affect the income stocks much, these stocks change as per the changes in interest rates of the debt instruments like bonds. Investors are more likely to shift to debt-related securities if they provide higher returns than income stocks. These acts happen during declining periods of capital gains.
4. The Lower Growth:
Most of the stocks that pay dividends do not show much growth in their stocks price. It is because the companies have reached the peak point, and the value of the stock will never grow until something new comes their way. However, these stocks can help in getting regular payouts.
People Who Can Invest in Income Stocks are:
Since income stocks are in favour of beginner and aged investors, here are the type of people who should invest in income stocks:
- Risk intolerant people since these stocks do not face fluctions
- Aged people who need a regular cash flow
- People who want to experience the stock market profits early
- People who want to diversify their investment portfolio
The 7 steps to follow to invest in Income Stocks:
One of the biggest mistakes most investors make is listening to peers. If something worked out for them does not mean that it should also work for others. Investing seems fun while getting started on the roller-coaster ride. However, it is when a person understands the depth of the stock market and regrets their past choices. The investment process includes:
- Define the investment goals (make sure they are long-term)
- Find the best financial advisor.
- Figure out the income stock to invest in
- Discuss the leaps and bounds with the advisor.
- Find the platform to buy the securities.
- Open the Demat account.
- Start investing.
What is a Growth Stock?
Unlike income stocks, growth stocks do not pay dividends. Growth stocks are the stocks of a company that anticipates the stock price to go up above the average of the market. These stocks do not pay dividends because all the profit gains are respent on the business to gain much more returns. Investors investing in growth stocks boost profits through capital gain, where they sell their shares.
Here, both the investor and the company are directly proportional to each other. When the company profits, the investor profits, and when the company declines, even the investor does. Hence, these investments are risky.
Features That Impact the Growth Stocks are:
Many things can make an impact, especially in the finance world. Here are some of the things to consider.
1. Gives Higher Returns:
The stocks can only outperform in the long run, at least 5-10 years. However, It depends on the behaviour of the company in the long run. The better the company performs, the better the returns will be. In the long run, not just through the invested money but also through compounding, the money can double for a person. The average return per year is 11% and above.
2. Beats Inflation:
Putting money in stocks is the best way to multiply the money over time. The actual growth of securities is the growth rate subtracted by the inflation rate. In today’s world, the volatility rate is lower than the market conditions. Hence, people can experience the best returns.
Identify the best growth stock:
As the title indicates, Growth Stocks are a surer way to build wealth in less time as they follow the compounding process. Here are some of the points to look at when looking for growth stocks:
- Price-to-earnings ratio: It assesses the value of the company’s stocks.
- Price earnings to growth rate ratio (PEG): It helps better understand the company’s growth
- Return on Equity (RoE): This tells how well the company is profiting in the market.
- Strong leadership: If the maintenance is not good, it will take investors nowhere. Remember, it is based on the behaviour of the company.
- The market share: Check how big the company is and the number of stocks it currently has. It will give an idea to invest in it or not.
So, going through these five things before investing in growth stocks can benefit people in the long run.
People who can invest in growth stocks are:
Since growth stocks are in favour of knowledgeable investors, here are the type of people who can invest in growth stocks:
- People with long financial dreams (preferably 5-10 years from the moment they invest)
People who can take risk
People who want to grow their wealth faster
6 Steps to Invest in Growth Stocks:
Each type of stock requires a set of different procedures to follow to invest. Here is the step-by-step process to follow to invest in Growth Stocks:
- Figure out the growth stock to invest in
- Discuss the leaps and bounds with the advisor
- Find the platform to buy the securities.
- Complete the document verification
- Open the Demat account.
- Start investing
The main differences between Income and Growth Stocks:
Although both are stocks, the main difference among them is that,
- Income stocks are less risky and pay regular, while growth stocks are high risk and do not pay regularly.
- Income stocks are to enjoy the benefits regularly, while growth stocks can only give profits once the stocks are sold.
- Income Stocks are from lar-cap companies, while growth stocks are widely from mid and small-cap companies.
Income vs Growth Stocks – Which One to invest in?
Based on the investor’s financial goals and interests:
- If you are a person new to the investment journey but want to have a positive vibe and want to enjoy the profits, then choose Income Stocks as they are risk-friendly. These stocks are also for aged people since they need regular cash flow. Or,
- If you are a person who wants to taste the recipe of risk and want to enjoy greater returns after a few years, then go for Growth Stocks.
There are various types of investments available in the market for everyone. However, it is up to the person to invest in any stock based on their goals and interests. But before that, people have to do their research to start on a positive note. Remember, “It is not about what others say. It is about what you think.”