Stock trading is not for the faint of heart. While it's true that a good number of people are able to make a fortune out of digital asset trading, the truth is that cryptocurrency trading and stock trading is inherently risky and complicated. Far more people have lost money in trading stocks.
This doesn't mean that stock trading is bad, but it emphasizes why people need to first understand what they're getting into before risking their hard-earned money. Apart from knowing how to evaluate whether a stock is profitable, one key area that novice investors need to understand is whether they should invest in dividend stocks or growth stocks. Knowing the difference between these two types of stocks will arm investors with the knowledge needed to manage the risks involved in stock trading.
What Are Dividend Stocks?
The main difference between dividend and growth stocks is in the manner in which each of these stock types generates your returns. Returns generated from dividend stocks come from regular dividend payments.
The performance of the same is based on the behavior of the company in whose stocks you’re investing in. Dividends are usually paid out quarterly, and they yield significantly lower returns than those yielded by growth stocks. A good way to ascertain the profitability of a particular dividend stock is to check whether its history shows returns that are both consistent and significant.
What Are Growth Stocks?
The returns from growth stocks are generated based on the stock’s share price. Your returns are earned by selling the stock when its value increases. This form of profit is referred to as “capital gains”. Much like in dividend stocks, the key to investing in growth stocks is to identify which stocks are most likely to perform well.
However, unlike dividend stocks, greater analysis needs to be done with growth stocks, as the profit is derived from the increase in value of the stock. This entails the use of the principles of technical analysis and fundamental analysis to determine the price movement of a stock. Trading growth stocks is inherently more risky than trading in dividends because there’s always a chance that a stock’s value could plummet.
All it takes is for one bad announcement to catalyze panic selling. Inversely, all it takes is one good announcement for the perceived attractiveness of a stock to drastically increase.
Which Stock Type Is Better for You?
Neither stock type is inherently better than the other. In fact, they both should be treated as different approaches to a goal. Depending on what you need, one stock type is going to serve you far better than the other.
The three things to take into consideration are: risk, cash flow, and time. Dividend stocks are great for investors who prefer something low-risk, reliable (in the sense that you can withdraw and use your returns upon realizing them), and short-term.
On the other hand, growth stocks are ideal for investors who are willing to take higher risks in exchange for significantly higher rewards, and for those who are willing to keep their assets tied up in the market, and those who are willing to wait for the price of the stock to appreciate to levels acceptable to them.
Regardless of the type of stocks you plan to invest in, it’s important to do your due diligence. There’s no excuse for ignorance, especially when the internet is replete with useful resources such as this guide to investing in dividend stocks.