Beginner's Guide to Growth and Income Stocks

Editor's note: This is a special excerpt from TheStreet.com Ratings' Ultimate Guided Tour of Stock Investing. Other Beginner's Guides cover stock basics, market indices, diversification, financial goals and risk tolerance.

How Fast (Growth) or Slow (Income) Will You Go?

Less risk , less reward. This trade-off describes income stocks. These are stocks that pay high and regular dividends to shareholders. Some industries known for income-producing stocks include gas, electric, telephone utilities, real estate investment trusts, banks, and insurance companies. High-quality income stocks have a long history of paying dividends, and in many cases they have a track record of regularly increasing dividends.

With growth stocks, it's the opposite trade-off: more risk, more reward. These stocks offer the greatest potential for growth, but they rarely pay dividends because profits are put right back into the company, rather than paid out directly to shareholders. Therefore, the payoff comes when you sell the stock.

Investors buy these stocks because their potential for growth is greater. Growth investors look at the rate at which a business is growing when deciding whether to buy its stock. Normally investors buy shares of new companies, new industries and new markets that are capable of increasing earnings , and other key factors that we'll study in subsequent guides.

A Portfolio to Grow By

Kathleen (see "Beginner's Guide to Financial Goals") wants to choose growth stocks to fund her children's education costs. Typically, the most common investment strategy considers age in deciding which stocks to invest in. The younger a child is, the more aggressive a parent can be with the investments, because the ups and downs of the market can be ridden out.

As the child gets older and closer to going to college, the investment mix becomes less risky. Kathleen would keep 80% or more in stocks when her children are young, then shift to 50% or 60% in stocks as they enter high school. Finally, when they are ready for college, she would reduce her asset allocation on stocks to 25%.

Guidelines for Investors of All Ages