Strategic Organizational Communication in a Global Economy (part 2) 01/20 by CharlesXLamson | Management Podcasts

Strategic Organizational Communication in a Global Economy (part 2) 01/20 by CharlesXLamson | Management Podcasts: 'Communication - the human connection - is the key to personal and career success.' -Paul J. Meyer

• 1st half - Masonic Secrets: Analysis of the Secret Teachings of All Ages by Manly P. hall (part A) 

• 2nd half - Analysis of Organizational Communication in a Global Economy

Strategic Organizational Communication: An Analysis (part 1) 01/18 by CharlesXLamson | Art Podcasts

Strategic Organizational Communication: An Analysis (part 1) 01/18 by CharlesXLamson | Art Podcasts: In communication studies, organizational communication is the study of communication within organizations. The flow of communication could be either formal or informal.

Personal Financial Planning: An "How-To" Guide (part 51)

INVESTING IN BONDS
by
Charles Lamson

In contrast to stocks, bonds are liabilities---they are nothing more than publicly traded IOUs where the bondholders are actually lending money to the issuer. They represent borrowed funds, and as such are a form of debt capital. Bonds are often referred to as fixed-income securities because the debt service obligations of the issuer are fixed---that is, the issuing organization agrees to pay a fixed amount of interest periodically and to repay a fixed amount of principal at or before maturity. Bonds normally have face values of $1,000 or $5,000, and maturities of 10 to 30 years or more.

Why Invest in Bonds

Like many other types of investment vehicles, bonds provide investors with two kinds of income: (1) They provide a generous amount of current income, and (2) they can often be used to generate substantial capital gains. The current income, of course, is derived from the interest payments received periodically over the life of the issue. Indeed, this regular and highly predictable source of income is one of the key factors that draws investors to bonds. But these securities can also produce capital gains, which occurs whenever market interest rates fall. A basic trading rule in the bond market is that interest rates and bond prices move in opposite directions: when interest rates rise, bond prices fall; and when they drop, bond prices rise. Thus, it is possible to buy bonds at one price and, if interest rate conditions are right, to sell them some time later at a higher price. Of course, it is also possible to incur a capital loss should market rates move against the investor. Taken together, the current income and capital gains earned from bonds can lead to highly competitive investor returns.

Bonds are also a highly versatile investment outlet. They can be used conservatively by those who seek high current income, or aggressively by those who actively go after capital gains. Although bonds have long been considered as attractive investments by those going after high levels of current income, it has only been since the advent of volatile interest rates that they have also become recognized for their capital gains potential and as trading vehicles. Indeed, given the relationship between bond prices to interest rates, investors found that the number of profitable trading opportunities increased substantially as wider and more frequent swings in interest rates began to occur.

Finally, because of the general high quality of many bond issues, they can also be used for the preservation and long-term accumulation of capital. In fact, some individuals, regularly and over the long haul, commit all or a good deal of their investment funds to bonds because of this attribute.

Bonds vs. Stocks

Although bonds definitely do have their good points---low risk and high levels of current income, along with desirable diversification properties---they also have a significant downside: their comparative returns. The fact is, relative to stocks, there is a big sacrifice in returns when investing in bonds. 

However, bond returns are far more stable than stock returns, plus they possess excellent portfolio diversification properties. Thus, except for the most aggressive of investors, bonds have a lot to contribute from a portfolio perspective. Indeed, as a general rule, adding bonds to a portfolio will---up to a point---have a much bigger impact on (lowering) risk than it will on return. Face it: You don't buy bonds for their high returns (except when you think interest rates are heading down); rather, you buy them for their current income and the stability they bring to a portfolio. 


Basic Issue Characteristics

A bond is a negotiable, long-term debt instrument that carries certain obligations on the part of the issuer. Unlike the holders of common stock, bondholders have no ownership or equity position in the issuing firm or organization. This is so because bonds are debt, and the bondholders, in a round-about way, are only lending money to the issuer.

As a rule, bonds pay interest every 6 months. The amount of interest paid is a function of the coupon, which defines the annual interest that will be paid by the issuer to the bondholder. For instance, a $1,000 bond with an 8 percent coupon would pay $80 in interest every year (i.e., $1,000 x 0.08 = $80), generally in the form of two $40 semiannual payments. The principle amount of a bond, also known as par value, specifies the amount of capital, that must be repaid at maturity---thus there is $1,000 of principal in a $1,000 bond.

Of course, debt securities regularly trade at market prices that differ from their principal (or par) values. This occurs whenever an issue's coupon differs from the prevailing market rate of interest; in essence, the price of an issue will change until its yield is compatible with prevailing market rate of interest; in essence, the price of an issue will change until its yield is compatible with prevailing market yields. Such behavior explains why a 7 percent issue will carry a market price of only $825 when the market yield is 9 percent; the drop in price is necessary to raise the yield on this bond from 7 percent to 9 percent, the drop in price is necessary to raise the yield on this bond from 7 percent to 9 percent. Issues with market values lower than par are known as discount bonds and carry coupons that are less than those on new issues. In contrast, issues with market value in excess of par are called premium bonds and have coupons greater than those currently being offered on new issues.


Types of Issues

A single issuer may have any number of bonds outstanding at a given point in time. In addition to their coupons and maturities, bonds can be determined from one another by the type of collateral behind them. In this respect, the issues can be viewed as having either junior or senior standing. Senior bonds are secured obligations, because they are backed by a legal claim on some specific property of the issuer that acts as collateral for the bonds. Such issues include mortgage bonds, which are secured by real estate, and equipment trust certificates, which are backed by certain types of equipment and are popular with railroads and airlines. Junior bonds on the other hand, are backed only with a promise by the issuer to pay interest and principle on a timely basis. There are several classes of unsecured bonds, the most popular of which is known as a debenture. Issued as either notes (with maturities of 2 to 10 years) or bonds (maturities of more than 10 years), debentures are totally unsecured in the sense that there is no collateral backing them up---other than the good name of the issuer. But in the final analysis, even in the world of corporate finance, that is all that matters.



Sinking Fund

Another provision that is important to investors is the sinking fund, which stipulates how a bond will be paid off over time. Not all bonds have these requirements, but for those that do, a sinking fund specifies the annual repayment schedule that will be used to pay off the issue and continue annually thereafter until all or most of the issue has been paid off. Any amount not repaid by maturity (which might equal 10 to 25 percent of the issue) is then retired with a single balloon payment.


Call Feature

Every bond has a call feature, which stipulates whether a bond can be called (that is, retired) prior to its regularly scheduled maturity date, and, if so, under what conditions. Often, a bond cannot be called until it has been outstanding for 5 years or more. Call features are normally used to replace an issue with the one that carries a lower coupon; in this way, the issuer benefits by being able to realize a reduction in annual interest cost. In an attempt to compensate investors who have their bonds called out from under them, a call premium (usually equal to about a half to one year's interest) is tacked on to the par value of the bond and paid to investors, along with the issue's par value, at the time the bond is called. For example, if a company decides to call its 12 percent bonds some 15 years before they mature, it might have to pay $1,000 for every $1,000 bond outstanding (a call premium equal to 9 months' interest---$120 x .75 = $90---would be added to the par value of $1,000).

Although this may sound like a good deal, it's really not. Indeed, the only party that benefits from a bond refunding is the issuer. The bondholder may indeed get a few extra bucks when the bond is called, but in turn, he or she loses a source of high current income---for example, the investor may have a 10 percent bond called away at a time when the best he or she can do in the market is maybe 7 or 8 percent. To avoid this, stick with bonds that are either noncallable (these issues cannot be called or retired prior to maturity, for any reason), or that have long call-deferment periods, meaning they cannot be called for refunding (or any other purpose) until the call-deferment period ends.

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The Rant - Business Communication (part 2 - conclusion) 01/17 by CharlesXLamson | Art Podcasts

The Rant - Business Communication (part 2 - conclusion) 01/17 by CharlesXLamson | Art Podcasts: 'Words are singularly the most powerful force available to humanity. We can choose to use this force constructively with words of encouragement, or destructively using words of despair. Words have energy and power with the ability to help, to heal, to hinder, to hurt, to harm, to humiliate and to humble.' -Yehuda Berg

Analysis of Business Communication Today (part 1) 01/15 by CharlesXLamson | Art Podcasts

Analysis of Business Communication Today (part 1) 01/15 by CharlesXLamson | Art Podcasts: 'Wise men speak because they have something to say; Fools because they have to say something.' -Plato

The Rant - This Is Propaganda: The Wonderful World of Public Relations (part 4) 01/14 by CharlesXLamson | Art Podcasts

The Rant - This Is Propaganda: The Wonderful World of Public Relations (part 4) 01/14 by CharlesXLamson | Art Podcasts: "If a young man tells his date how handsome, smart and successful he is – that's advertising. If the young man tells his date she's intelligent, looks lovely, and is a great conversationalist, he's saying the right things to the right person and that's marketing. If someone else tells the young woman how handsome, smart and successful her date is – that's PR." – S. H. Simmons

Personal Financial Planning: An "How-To" Guide (part 50)

Timing Your Investments
by
Charles Lamson

Once you find a stock you think will give you the kind of return you are looking for, you are ready to deal with the matter of timing your investment. As long as the prospects for the market and the economy are positive, the time may be right to invest in stocks. On the other hand, there are a couple of conditions when investing in stocks does not make any sense at all. In particular, do not invest in stocks if:

• You feel very strongly that the market is headed down in the short run. If you are absolutely certain the market is in for a big fall (or will continue to fall, if it is already doing so), then wait until the market drops, and buy the stock when it is cheaper.
• You feel uncomfortable with the general tone of the market---it lacks direction, or there is way too much price volatility to suit you, for example, this became a problem prior to and after the October 1987 crash, when computer-assisted trading started taking over the market. The result was a stock market that behaved more like a commodities market, with an intolerable amount of price volatility. When this happens, fundamentals go out the window, and the market simply becomes too risky. Do what the pros do, and wait it out on the sidelines.

Why Invest in Stocks?

There three basic reasons for investing in common stock: (1) to use the stock as a warehouse of value, (2) to accumulate capital, and (3) to provide a source of income. Storage of value is important to all investors, because nobody likes to lose money. However, some investors are more concerned about it than others and therefore put safety of principal first in their stock selection process. These investors are more quality-conscious and tend to gravitate toward blue chips and other non-speculative shares. Accumulation of capital generally is an important goal to individuals with long-term investment horizons. These investors use the capital gains and dividends that stocks provide to build up their wealth. Some use growth stocks for such purposes; others do it with income shares; still others use a little of both. Finally, some people use stocks as a source of income; to them, a dependable flow of dividends is essential. High-yielding, good quality income shares are usually their preferred investment vehicle.

Advantages and Disadvantages of Stock Ownership

Ownership of common stock has both advantages and disadvantages. Its advantages are threefold. First, the potential returns, in the form of both dividend income and price appreciation, can be quite substantial. Second, many stocks are actively traded stocks; thus they are a highly liquid form of investment---meaning they can be quickly bought and sold. Finally, they do not involve any direct management (or unusual management problems) and market/company information is usually widely published and readily available.

Risk, the problem of timing purchases and sales, and the uncertainty of dividends are all disadvantages of common stock ownership. Although potential common stock ownership. Even though careful selection of stocks may reduce the amount of risk to which the investor is exposed, the risk-return trade-off cannot be completely eliminated. In other words, high returns on common stock are not guaranteed; they may or may not occur depending on numerous economic, industry, and company factors. The timing of purchases and sales is closely related to risk. Many investors purchase a stock, hold it for a period of time during which the price drops and then sell it below the original purchase price---that is, at a loss. The proper strategy, of course, is to buy low and sell high, but the problem of predicting price movements makes it difficult to implement such a plan.


Be Sure to Plow Back Your Earnings

Unless you are living off the income, the basic investment objective with stocks is the same as it is with any other security: to earn an attractive, fully compounded rate of return. This requires regular reinvestment of dividend income. And there is no better way to accomplish such reinvestment than through a dividend reinvestment plan (DRP). The basic investment philosophy at work here is that if the company is good enough to invest in, it is good enough to reinvest in. In a dividend reinvestment plan, shareholders can sign up to have their cash dividends automatically reinvested in additional shares of the company's common stock---in essence, it is like taking your cash dividends in the form of more shares of common stock. The idea is to put your money to work by building up your investment in the stock. Such an approach can have a tremendous impact on your investment decision over time, as seen in Exhibit 1.

Today, over 1,000 companies (including most major corporations) have DRPs, and each one provides investors with a convenient and inexpensive way to accumulate capital. Stocks in most DRPs are acquired free of any brokerage commissions, and most plans allow partial participation. That is, rather than committing all their cash dividends to these plans, participants may specify a portion of their shares for dividend reinvestment and receive cash dividends on the rest. Some plans even sell stocks to their DRP investors at below market prices---often at discounts of 3 to 5 percent. In addition, most plans credit fractional shares to the investors' accounts. Shareholders can join these plans simply by sending in a completed authorization form to the company. Once in the plan, the number of shares you hold will begin to accumulate with each dividend date. There is a catch, however---even though these dividends take the form of additional shares of stock, reinvested dividends are taxable, in the year they are received, just as if they had been received in cash.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK,, PGS. 519-522*

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The Rant- This Is Propaganda: The Wonderful World of Public Relations (part 3) 01/11 by CharlesXLamson | Art Podcasts

The Rant- This Is Propaganda: The Wonderful World of Public Relations (part 3) 01/11 by CharlesXLamson | Art Podcasts: ?The history of PR is… a history of a battle for what is reality and how people will see and understand reality.? – Stuart Ewen

The Rant - This Is Propaganda: The Wonderful World of Public Relations (part 2) 01/10 by CharlesXLamson | Current Events Podcasts

The Rant - This Is Propaganda: The Wonderful World of Public Relations (part 2) 01/10 by CharlesXLamson | Current Events Podcasts: Some are born great, some achieve greatness, and some hire public relations officers. Daniel J. Boorstin Historian, professor, attorney, and writer

The Rant - This is Propaganda: The Wonderful World of Public Relations (part 1) 01/08 by CharlesXLamson | Art Podcasts

The Rant - This is Propaganda: The Wonderful World of Public Relations (part 1) 01/08 by CharlesXLamson | Art Podcasts: pub·lic re·la·tions /'p?blik r?'laSH?nz/ noun the professional maintenance of a favorable public image by a company or other organization or a famous person. the state of the relationship between the public and a company or other organization or a famous person. 'companies justify the cost in terms of improved public relations'

Personal Financial Planning: An "How-To" Guide (part 49)

Selecting a Stock

by

Charles Lamson

You want an investment that provides an attractive rate of return---one that meets or exceeds your required return. So, how do you go about selecting such a stock? The answer is by doing a little digging and crunching a few numbers. Here is what you will want to do. To begin with, find a company you like and then take a look at how it has performed over the past 3 to 5 years. Find out what kind of growth rate (in sales) it has experienced, if it has a strong ROE and has been able to maintain or improve its profit margin, how much it has been paying out to stockholders in the form of dividends, and so forth. This kind of information is readily available in publications like Value Line and S&P Stock Reports, or online, at a number of sites. The idea is to find stocks that are financially strong, have done well in the past, and continue to be market leaders or hold prominent positions in a given industry or market segment. Looking at the past is only the beginning, however; what is really important to stock valuation is the FUTURE! That is, the value of a share of stock at any point in time is a function of future returns, not past performance.

So let's turn our attention to the expected future performance of a stock. The idea is to assess the outlook for the stock, thereby, gaining some insight about the benefits to be derived from investing in it. Of particular concern are future dividends and share price behavior. As a rules, it does not make much sense to go out more than 2 or 3 years because the accuracy of most forecasts begins to deteriorate rapidly after that point. Thus, using a 3-year investment horizon, you would want to forecast annual dividends per share for each of the next three years, plus the future price of the stock at the end of the 3-year holding period (obviously, if the price of the stock is projected to go up over time, you will take some capital gains). You can try to generate these forecasts yourself or you can look to a publication like Value Line to obtain projections (Value Line projects dividends and share prices 3 to 5 years into the future). Once you have projected dividends and share price, you can use the approximate yield equation, or a hand-held calculator, to determine the expected return from the investment.

To see how that can be done, consider the common shares of Medtronic, Inc., the world's largest manufacturer of implantable biomedical devices. According to Value Line, the company has very strong financials; its sales have been growing at around 15 or 16 percent per year for the first five years, it has a net profit margin of more than 20 percent, and an ROE of around 20 percent (2005). Thus, historically, the company has performed very well and is definitely a market leader in its field. In June of 2003, the stock was trading at around $49 a share and was paying annual dividends at the rate of about 30 cents a share. Value Line was projecting dividends to go up about 58 cents a share within the next 3 to 5 years, they were also estimating the price of the stock could rise to as high as $80 a share within 3 years.   

Using these Value Line projections and given current dividends (in 2003) of 30 cents a share, we could expect dividends of, say, 36 cents a share next year (2004), 47 cents a share the year after (2005), and 58 cents a share in 2006---assuming, of course, that dividends do in fact grow as estimated by Value Line. Now, because the approximate yield equation uses "average annual current income" as one of the inputs, let's use the midpoint of our projected dividends (47 cents a share) as a proxy for average annual dividends. In addition, given this stock is currently trading at $49 a share, has a projected future price of $80 a share, and we have a 3-year investment horizon, we find our expected return as follows:

Thus, if Medtronic stock performs as expected, it should provide us with a return of around 17 or 18 percent. In today's market, that would be a very attractive return, and one that very likely will exceed our required rate of return (which probably should be around 12 to 15 percent). If that is the case, then this stock very definitely SHOULD be considered a viable investment candidate. According to our standards, the stock is currently undervalued and thus, should be given serious consideration as a possible addition to our portfolio.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK*

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The Rant - An Analysis of Persuasion in the Media Age (part 4 - conclusion) 01/07 by CharlesXLamson | Art Podcasts

The Rant - An Analysis of Persuasion in the Media Age (part 4 - conclusion) 01/07 by CharlesXLamson | Art Podcasts: Advertising is fundamentally persuasion and persuasion happens to be not a science, but an art. William Bernbach

The Rant - An Analysis of Persuasion in the Media Age 01/05 by CharlesXLamson | Current Events Podcasts

The Rant - An Analysis of Persuasion in the Media Age 01/05 by CharlesXLamson | Current Events Podcasts: 1ST half Aristotle's Treatise on Rhetoric 2nd half practical contemporary application of rhetoric and persuasion in the media age

Personal Financial Planning: An "How-To" Guide (part 48)

Market Globalization and the Allure of Foreign Stocks

by

Charles Lamson

In addition to all the different types of stocks mentioned above, a growing number of American investors are turning to foreign markets as a way to earn attractive returns. Such securities became increasingly popular during the 1980s and 1990s, and many investment advisors today recommend that investors put at least part of their capital into foreign stocks. A good deal of this interest has come about as advances in technology and communications, together with the gradual elimination of political and regulatory barriers, have allowed investors to make cross-border securities transactions with relative ease. Because of these changes, not only are more and more Americans beginning to invest in foreign securities, but foreign investors are becoming major players in U.S. markets as well. The net result is a rapidly growing trend toward market globalization, whereby investing is practiced on an international scale rather than confined to a single (domestic) market.

Ironically, as our world is becoming smaller, our universe of investment opportunities is growing by leaps and bounds. Consider, for example, that in 1970 the U.S. stock market accounted for fully two-thirds of the world market. In essence, our stock market was twice as big as all the rest of the world's stock markets combined. That is no longer true, for in 2002 the U.S. share of the world equity market had dropped to less than 50 percent. Today, the world equity markets are dominated by just six countries, which together account for about 80 percent of the total market. The United States, by far, has the biggest equity market, which in mid-2003 had a total market value of around $10 trillion. In a distant second place was Japan (at about one-third the size of the U.S. market), closely followed by the United Kingdom. Rounding out the list was Germany, France, and Canada.

In addition to these six, another dozen or so markets, such as Switzerland, Australia, Italy, Singapore, and Hong Kong, are also regarded as major world players---not to mention a number of relatively small, emerging markets, such as Mexico, South Korea, Thailand, and Russia. Thus, investors who continue all their investing to the U.S. markets are missing out on a big chunk of the worldwide investment opportunities. Not only that, they are missing out on some very attractive returns as well. Over the 23-year period from 1980 through 2002, the U.S. stock market provided the highest annual return just once in 1982. And that statistic pertains to just the 8 largest (major) markets of the world---it does not include the smaller (emerging) markets that, in recent years, have provided some spectacular returns. Of course, it also ignores some spectacular crashes that have occurred recently in these same emerging markets.

So if you are looking for better returns, you might want to give some thought to investing in foreign stocks. There are several different ways of doing that. Without a doubt, from the perspective of an individual investor, the best and easiest way is through international mutual funds. Mutual funds aside, you could, of course, buy securities directly in the foreign markets. Investing directly is not for the uninitiated, however. For although most major U.S. brokerage houses are set up to accommodate investors interested in buying foreign shares, many logistical problems still have to be faced. Fortunately, there is an easier way, and that is to buy foreign securities that are denominated in dollars and traded directly on U.S. exchanges. One such investment vehicle is the American Depository Receipt (ADR). ADRs are just like common stock, except that each ADR represents a specific number of shares in a specific foreign company. Indeed, the shares of more than 1,000 companies from some 50 foreign countries are traded on U.S. exchanges as ADRs, companies like Sony, Ericsson Telephone, Nokia, Vadafone Airtouch, Shanghai Petro-chemicals, and Grupo Televisa, to mention just a few. ADRs are a great way to invest in foreign stocks because they are bought and sold, on American markets, just like stocks in U.S. companies---and their prices are quoted in dollars, not British pounds, Swiss franks, or Euros. Furthermore, all dividends are paid in dollars.

Whereas the temptation to go after higher returns may be compelling, keep one thing in mind when investing in foreign stocks---that is, whether investing in foreign securities directly or through something like ADRs, the whole process of investing involves a lot more risk. That is because the behavior of foreign currency exchange rates plays a vital role in defining returns to U.S. investors. As the U.S. dollar becomes weaker (or stronger) relative to the currency in which the foreign security is denominated, the returns to U.S. investors, from investing in foreign securities will increase (or decrease) accordingly. Currency exchange rates can, in fact, have a dramatic impact on investor returns and quite often can convert mediocre returns, or even losses, into very attractive returns---and vice versa. only one thing really determines whether the impact is going to be positive or negative, and that is the behavior of the U.S. dollar relative to the currency in which the foreign security is denominated. In effect, a stronger dollar has a negative impact on total returns to U.S. investors, and a weaker dollar has a positive impact. Thus, other things being equal, the best time to be in foreign securities is when the dollar is falling, because that increases returns to U.S. investors.

smart.sites A good source for overseas business news and research on stocks not listed on U.S. exchanges is the Financial Times Web site, FT.com (www.ft.com).

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 515-517*

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smart.sites

A good source for overseas business news and research on stocks not listed on U.S. exchanges is the Financial Times Web site, FT.com (www.ft.com).

The Rant - An Analysis of Persuasion in the Media Age (part 2) 01/03 by CharlesXLamson | Art Podcasts

The Rant - An Analysis of Persuasion in the Media Age (part 2) 01/03 by CharlesXLamson | Art Podcasts: The product of the interaction between media sources, channels, content and audience is called media. The term refers to the web of sources, channels and content. It includes broadcast signals, media personalities and the words and images of media content

Personal Financial Planning: An "How-To" Guide (part 47)

Types of Common Stock

by

Charles Lamson

Common stocks are often classified on the basis of their dividends or their rate of growth in EPS (earnings per share). Among the more popular types of common stock are blue chip, growth, tech stocks, income speculative, cyclical defensive, mid-cap, and small-cap stocks.

Blue-Chip Stocks

These are the cream of the common stock crop; blue chips are stocks that are unsurpassed in quality and have a long and stable record of earnings and dividends. They are issued by large, well-established firms that have impeccable financial credentials---firms like GE, Wal-Mart, Citigroup, Microsoft, 3M Co., United Parcel Service, and Pfizer. These companies hold important, if not leading, positions in their industries and often determine the standards by which other firms are measured. Blue chips are particularly attractive to investors who seek high-quality investment outlets that offer decent dividend yields and respectable growth potential. Many use them for long-term investment purposes, and, because of their relatively low-risk exposure, as a way of obtaining modest but dependable rates of return on their investment dollars. They are popular with a large segment of the investing public, and as a result, are often relatively high priced, especially when the market is unsettled and investors become more quality conscious.

Growth Stocks

Stocks that have experienced, and are expected to continue experiencing, consistently high rates of growth in operations and earnings are known as growth stocks. A good growth stock might exhibit a sustained rate of growth in earnings of 15 to 20 percent (or more) over a period during which common stocks are averaging only 6 to 8 percent. Starbuck's, Lowe's, Medtronic, Harley-Davidson, Kohl's, and Boston Scientific are all prime examples of growth stocks. These stocks normally pay little or nothing in dividends, because the firm's rapid growth potential requires that its earnings be retained and reinvested. The high growth expectations for these stocks usually cause them to sell at relatively high P/E (price/earnings) ratios, and they typically have betas in excess of 1.0. Because of their potential for dramatic price appreciation, they appeal mostly to investors who are seeking capital gains rather than dividend income.

Tech Stocks

Over the past 10 to 15 years, tech stocks have become such a dominant force in the market that they deserve to be put in a class all their own. Tech stocks basically represent the technology sector of the market, and include all those companies that produce or provide technology-based products and services such as computers, semiconductors, data storage devices, computer software and hardware, peripherals, Internet services, content providers, networking, and wireless communications. These companies provide high-tech equipment, networking systems, and online services to all lines of businesses, schools, healthcare facilities, communications firms, governmental agencies, and home users. Although some of these stocks are listed on the NYSE and AMEX, the vast majority are traded on the Nasdaq. These stocks, in fact, dominate the Nasdaq market and as such, the Nasdaq Composite Index and other Nasdaq measures of market performance. They were the ones that were hammered especially hard during the market fall of 2000-02, when the tech-heavy Nasdaq Composite fell nearly 80 percent. Indeed, many tech stocks fell to just pennies a share, as literally hundreds of these firms simply went out of business. But the strongest did survive, and some even thrived.

There are literally thousands of companies that fall into the tech stock category, including everything from very small firms providing some service on the Internet to huge multinational companies. These stocks would likely fall into either the growth stock category (see above) or the speculative stock class (see below), though some of them are legitimate blue chips. Although tech stocks may offer the potential for attractive (and in part anyway) are probably most suitable for the more risk-tolerant investor. Included in the tech-stock category you will find some big names, such as Microsoft, Cisco Systems, Applied Materials, and Dell, as well as many not-so-big names such as BEA  Systems, NVIDIA, Invitrogen, KLA-Tencor, and Rambus.

Income Stocks Versus Speculative

Stocks whose appeal is based primarily on the dividends they pay out are known as income stocks. they have a fairly stable stream of earnings, a large portion of which is distributed in the form of dividends. Income shares have relatively safe and high level of current income from their investment capital. An added (and often overlooked) feature of these stocks is that, unlike bonds and preferred stock, holders of income stock can expect the amount of dividends paid to increase over time. Examples of income stock include J.P. Morgan Chase, Hershey Foods, Pitney Bowes, R.R. Donnely, AT&T, Bank of America, and PPG Industries. Because of their low risk, these stocks commonly have betas (The beta of an investment indicates whether the investment is more or less volatile than the market as a whole.) of less than 1.0.

Rather than basing their investment decisions on a proven record of earnings, investors in speculative stocks gamble that some new information, discovery or production technique will favorably affect the growth of the firm and inflate the price of its stock. For example, a company whose stock is considered speculative may have recently discovered a new drug or located a valuable resource, such as oil. The value of speculative stocks and their P/E ratios tend to fluctuate widely as additional information with respect to the firm's future is received. The betas for speculative stocks are nearly always all in excess of 1.0. Investors in speculative stocks should be prepared to experience losses as well as gains, since these are high-risk securities. They include companies like P.F. Chang's China Bistro, Quicksilver, K-Swiss, Indexx Labs, Serena Software, and Dollar General.

Cyclical Stocks or Defensive Stocks

Stocks whose price investments tend to follow the business cycle are called cyclical stocks. This means that when the economy is in an expansionary stage (recovery or expansion), the prices of cyclical stocks increase, and during a contractionary stage (recession or depression), they decline. Most cyclical stocks are found in the basic industries---automobiles, steel, and lumber, for example; these industries are sensitive to changes in economic activity. Investors try to purchase cyclical stocks just prior to an expansionary phase and sell just before the contraction occurs. Because they tend to move with the market, these stocks always have positive betas. Caterpillar, Genuine Parts, Maytag Corp., Rohm & Haas, Alcoa, and Tinken are examples of cyclical stocks.

The prices and returns from defensive stocks, unlike those of cyclical stocks, are expected to remain stable during periods of contraction in business activity. For this reason, they are often called countercyclical. The shares of consumer goods companies, certain public utilities, and gold mining companies are good examples of defensive stocks. Because they are basically income stocks, their earnings and dividends tend to hold their market prices up during periods of economic decline. Betas on these stocks are quite low and occasionally even negative. Bandag, Checkpoint Systems.

Mid-Caps and Small-Caps

In the stock market, a stock's size is based on market value---or, more commonly, on what is known as its market capitalization or market cap. A stock's market cap is found by multiplying its market price by the number of shares outstanding. Generally speaking, the market can be broken into three major segments, as measured by a stock's market "cap":

Small-cap---Stocks with market caps of less than $1 billion

Mid-cap---Market caps of $1 billion to $4 or $5 billion

Large-cap---Market caps of more than $4 or $5 billion

In addition to these three segments, another is reserved for the really small stocks, known as micro-caps. Many of these stocks have market caps below $100 million (some as low as $10 to $15 million), and should only be used by investors who fully understand the risks involved and can tolerate such risk exposure.

Of the three major categories above, the large-cap stocks are the real biggies, the Wal-Marts, GEs, and Microsofts of the world. Many of these are considered to be blue chip stocks, and, although there are far fewer large-cap stocks than any of the other market cap categories, these companies account for about 80 to 90 percent of the total value of all U.S. equity markets. Just because they are big, however, does not mean they are better. Indeed, both the small- and mid-cap segments of the market tend to hold their own with, or even outperform, large stocks over time.

Mid-cap stocks are a special breed unto themselves and offer investors some very attractive return opportunities. They provide much of the sizzle of small-stock returns, but without all the price volatility. At the same time, because they are fairly good-sized companies, and many of them have been around for a long time, they offer some of the safety of the big, established stocks. Among the ranks of the mid-caps are such well-known companies as Tootsie Roll, Wendy's International, Barnes & Noble, PetSmart, and the Cheesecake Factory, in addition to some not-so-well-known names. For the most part, although these securities offer a nice alternative to large stocks without all the drawbacks and uncertainty of small-caps, they probably are most appropriate for investors who are willing to tolerate a bit more risk and price volatility.

Some investors consider small companies to be in a class by themselves. They believe these firms stocks hold especially attractive return opportunities, which in many cases, has turned out to be true. Known as small-cap stocks, these companies generally have annual revenues of less than $250 million, and, because of their size, spurts of growth can have dramatic effects on their earnings and stock prices. Green Mountain Power, Hancock Fabrics, Hot Topic, JoAnn Stores, and Sonic Corp. are just some of the better known small-cap stocks. Now although some small-caps (like Sonic, for example) are solid companies with eaqually solid financials, that is definitely not the case with most of them. Indeed, because many of these companies are so small, they do not have a lot of stock outstanding, and their shares are not widely traded. In addition, small company stocks have  a tendency to be "here today gone tomorrow." Although some of these stocks may hold the potential for high returns, investors should also be aware of the very high risk exposure that comes with many of them.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 513-515*

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