Cyclical stocks. These are stocks of companies that do not show any clear growth trend, but where the stocks fluctuate in line with the business cycle prosperity and recession or some other recognizable pattern. Obviously, one can make money if he buys these near the bottom of a price cycle and sells near the top. But the bottoms and tops can be hard to recognize when they occur and sometimes, when you think that a stock is near the bottom of a cycle, it may instead be in a process of long-term decline. 3.3 Special Situations.
Theres a type of investment that professionals usually refer to as special situations. These are cases where some particular corporate development-perhaps a merger, change of control, sale of property, etc seems likely to raise the value of a stock.
Special situation investments may be less affected by general stock market movements than the average stock investment but if the expected development doesnt occur, an investor may suffer a loss, sometimes sizable. Here the investor has to judge the odds of the expected developments actually coming to pass. 4. PREFERRED STOCKSA preferred stock is a stock which bears some resemblances to a bond see below. A preferred stockholder is entitled to dividends at a specified rate, and these dividends must be paid before any dividends can be paid on the company s common stock. In most cases the preferred dividend is cumulative, which means that if it isn t paid in a given year, it is owed by the company to the preferred stockholder.
If the corporation is sold or liquidates, the preferred stockholders have a claim on a certain portion of the assets ahead of the common stockholders. But while a bond is scheduled to be redeemed by the corporation on a certain maturity date, a preferred stock is ordinarily a permanent part of the corporation s capital structure.
In exchange for receiving an assured dividend, the preferred stockholder generally does not share in the progress of the company the preferred stock is only entitled to the fixed dividend and no more except in a small minority of cases where the preferred stock is participating and receives higher dividends on some basis as the company s earnings grow. Many preferred stocks are listed for trading on the NYSE and other exchanges, but they are usually not priced very attractively for individual buyers.
The reason is that for corporations desiring to invest for fixed income, preferred stocks carry a tax advantage over bonds. As a result, such corporations generally bid the prices of preferred stocks up above the price that would have to be paid for a bond providing the same income. For the individual buyer, a bond may often be a better buy. 4.1