In the context of the stock market as a whole, stocks of companies are generally sub-categorised into various different types. One such categorisation is based on the kind of value that the stocks offer to the investors. According to this kind of categorisation, stocks can be broadly split into two types - dividend stocks and growth stocks.
If you’re a first-time investor or a beginner who isn’t very well versed with the ins and outs of the stock market, which one should you invest in? In this article, we’re going to be looking at just that. So, let’s begin.
What are dividend stocks?
In the stock market, stocks of companies that offer dividends at regular intervals are termed as dividend stocks. These entities usually have a long history of being in business and are fundamentally very strong. They also command a much higher share price compared to other companies and are mostly in the mid-cap and large-cap segment in terms of market capitalization.
Since dividend stocks have already established a strong foothold in their business, the future growth prospects are usually slim. The share price of such stocks tend to be quite stable and offer little wealth creation opportunity.
What are growth stocks?
In the stock market, growth stocks are usually companies that have a short history of being in business. Since they’re relatively newer, they’re far from being fundamentally strong. Such companies generally are not profitable or generate low amounts of profit. And even if they do generate profits, they’re usually put back into the business instead of distributing it to the shareholders.
As a result, growth stocks almost always never distribute any dividends whatsoever. The share price of such stocks tend to be lower and more volatile in nature, with their market cap being around the small and mid-cap segments. However, since growth stocks are companies that are effectively still growing, the prospect of future capital appreciation is far higher. This means that you can invest in such a company and sell its stock after a few years at a significant profit.
Which is better - dividend stocks or growth stocks?
Now that you’ve seen what dividend and growth stocks are, let’s take a look at which one of them you should look to invest in.
Dividend stocks are great investment options for individuals who’re looking for a steady source of income from the stock market with a relatively low amount of investment risk. On the contrary, individuals who have a slightly higher tolerance for investment risk and who wish to enjoy larger capital appreciation could look towards investing in growth stocks.
Ideally, no matter what your ultimate financial goal is, it is advisable to invest in a mix of both dividend stocks as well as growth stocks. This way, you will be able to leverage both the steady income from dividend stocks as well as the future capital appreciation potential of growth stocks.
Conclusion
Both dividend and growth stocks come with their own set of advantages. By investing in them, you get to effectively enjoy the advantages of both these kinds of stocks. That said, before you go ahead with your investment on either of these stocks, you should first ensure that you have a demat account.
If you don’t have one, simply get in touch with Motilal Oswal to open a demat account for free within a few minutes. And while you’re at it, you can also open an online trading account as well.
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