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As a first-time investor, it is probably within your interests to become more familiar with and understand the terminology that might often appear in your research. It might not only be an opportunity for you to make a better investment in the short term but an opportunity to become a better investor as a whole in the long-run.
Being fully aware of the different categories and classifications might be the right step you need to make smarter investments and create a diverse and robust portfolio.
We have compiled some information regarding the most common types of stocks you might find.
Common and preferred stocks
As you might have guessed from the name alone, common stocks and preferred stocks are probably the most typical stocks you can find in any given market. They’re the stocks that most people usually invest in.
Common stocks work kind of as your “default stock.” It represents partial ownership of a company of your choosing. They represent an opportunity to win a profit in return when you either sell it to the highest bidder or when the company dissolves. Then they pay you back a given amount of whatever assets remain.
On the other hand, preferred stocks work almost the same way as common stock, only differing in the fact that (as its name suggests) it gives preference to any owner of this kind of stock over those who own a common stock instead. For example, when dealing with any situation involving paying a certain amount of money to every shareholder, those with preference tend to be the first on the line to receive said income.
It is important to be aware that some companies only offer common stocks. However, the fact that a company is foreign to preferred stocks doesn’t necessarily mean that it is one that you shouldn’t be investing in.
Large-cap, mid-cap, and small-cap stocks
A great tool used to determine any company’s actual value on the stock market is the market cap.
In short, a market-cap is the numerical value that comes from the total sum of the price of every single stock that a given company is currently offering in the market. Once that calculation is done, their stocks can be categorized in one of many categories based on their market cap’s actual size.
Small-cap stocks are those stocks with market-caps of in-between $300 million and $2 billion. When a company is considered a small-cap type, it probably just started. In other words, it is a young company. They tend to represent an investment opportunity that leads to exponential growth, yet it is highly volatile.
If you are interested in investing in small-cap stocks, you should consider doing lots of research regarding a company’s current risks and how they could manage them in the foreseeable future.
On the other hand, large-cap stocks are those stocks with values higher than $200 billion. They usually belong to the companies that have already stood out the test of time and have dominated their respective markets for a considerable time. Investing in them usually represents a moderate amount of growth, yet one of extreme stability.
Investing in Large-cap stocks usually involves not generating as much wealth as it is with other investments, but it can be highly relied upon for its steadiness.
However, there is also a middle point that balances the aspects of both. Middle-cap stocks are those stocks with a market cap between $2 billion and $10 billion, and they usually represent a company that is just in the middle of its growth curve.
They offer a respectable expectancy for growth while still offering a decent amount of stability. It might not have growth as remarkable as a small-cap, nor the stability of a large-cap, but it is still a worthwhile investment in general.
Nevertheless, well-established investors usually recommend keeping a diversified portfolio that includes stocks of every kind.
Domestic stocks and international stocks
Stocks can also be categorized by their location.
To consider companies with a presence in more than one country, people tend to categorize them based on where their actual main headquarters are located.
To exemplify, for a U.S. citizen, any company that has its primary roots on U.S. territory serves as a domestic stock, while a company that might have its origins in a country such as Canada works instead as an international stock for that same investor.
Growth stocks and value stocks
Investors can also choose where to invest their money based on one of two specific methods chosen mainly through which one they prefer over the other, and that well-encompasses the following types of stocks: growth stocks and value stocks.
When it comes to growth stocks, investors prefer to invest in companies that show significant growth potential in short periods, meaning that their profits can also elevate themselves just as quickly. However, they come with high levels of risk for the investor.
What does this mean?
Companies that belong to the growth stocks category tend to recognize popular demands among their customers and work hard to deliver value that fits into that same demand.
They also tend to make sure their products stay at the top of the line and above those of their competitors for the long-run.
However, that’s easier said than done and finding a company that can consistently accomplish such feats can be extremely difficult. The high amount of risks that come with growth stocks usually manifest themselves in dealing with a company unable to manage said proficiency and success levels.
In reality, choosing to invest in growth stocks usually comes with extensive amounts of research to complement your decision-making process.
For that reason, some investors choose to go with an alternative method: value stocks.
On the other hand, investors who prefer value stocks tend to analyze stocks currently being sold with a price lower than what they should be valued for.
By evaluating their current stock, they tend to estimate which company can have a bigger chance for growth in the long-run and profit over their original investment at a slower pace. However, since value stocks tend to appear in the form of already mature businesses, that means that both the company’s growth and your profits tend to appear in more moderate amounts than those of a growth stock. Moreover, value stocks also tend to pay out dividends that you could also use as an investor.
So, while not as extravagant as an investment in growth stocks, a value stock usually proves itself as a safer choice for an investment.
When any company first goes public in any market, they usually do so with Initial Public Offerings Stocks or IPO Stocks.
Investors are usually the most excited when an opportunity such as this one takes place. It means solidifying the foundations that could carry out a profitable business and an opportunity for significant returns to your investment. However, they also are volatile, so they require careful consideration on your part as well.
A stock usually retains its status as an IPO stock for one to four years after being initially offered and sold to the public.
Dividend stocks and non-dividend stocks
Some companies decide to participate in the stock market by offering dividend stocks.
A dividend stock means for an investor to receive a certain amount of the company’s earnings in the form of a regular-basis payment, given to you just by being a stockholder.
While any dividend payment might not be as remarkable compared to what you might earn in the long-run by reselling your stocks, it still represents another opportunity for any investor to receive a fixed and dependable income.
However, some companies choose not to go through with dividend stocks.
Keep in mind that that doesn’t necessarily mean that a company that doesn’t offer dividends is a wrong investment opportunity since they can still be solid and significant just by raising their prices over time. Some of the market’s most prominent companies don’t even pay dividends and always have made substantial wealth for their investors.
Income stocks are a derivative form of dividend stocks.
While they also offer payments regularly for any stockholder, they are usually provided by companies with meagre chances of growth at all.
For you to make the best use of an income stock, it is usually recommended that you invest in one only when you are nearing retirement, as it primarily represents an opportunity to draw cash as quickly as possible.
Cyclical stocks and non-cyclical stocks
Economies tend to live through both periods of expansion and periods of recession. Whichever is currently taking place is also of substantial influence to the current status of the market.
The cyclical stock describes such companies that can face notably low points whenever the economy is at a recession point. For example, nowadays, with the pandemic at full effect, businesses like travelling and entertainment have lost high amounts of customers and, in development, have lost perceivable amounts of earnings. However, when the economy hits a time of expansion instead, cyclical stocks usually face periods of high enough demands to make such companies rebound completely.
On the other hand, the non-cyclical stock represents the portion of the market that isn’t affected by whatever outside force is at play regardless of its current status. These businesses usually offer products and services that are day-to-day needs that people will always require to have at hand. Think of grocery stores and restaurants, as people will always need to eat.
When facing low points in the economy, non-cyclical stocks tend to outperform their counterparts. On the other hand, when facing high points, it is usually the other way around.
Safe stock is a term given to those companies whose stock prices make relatively small movements in price regardless of the current status of the market or the economy, especially when compared to the overall performance of the stock market at that exact moment in time.
They tend to pay dividends and be of low-volatility overall.
Considering that, they usually represent safer choices for investments when one is doing so under challenging circumstances.
Stock market sectors
Stocks, overall, tend to be distributed based on which type of business they belong to.
Here are some examples:
- Communication services
- Consumer Discretionary
- Consumer Staples
- Real Estate
When investing, some people’s focuses aren’t turned on whichever company is generating the most earnings nor which company represents the better opportunity for generating wealth. Instead, some people chose based on whichever company emphasizes their collateral impact on the environment and their working force.
This is what is called Environmental, Social and Governance, or ESG Investing.
More than an initiative to exclude companies that fail with their social responsibilities, it serves as an inspiration for them to improve their ways of doing things, which has also proven to positively impact their performance as a company overall.
Blue-chip stocks and penny stocks
And, finally, there’s the matter of blue-chip stocks and penny stocks.
Those companies at the absolute top of their respective business worlds, with hard-built reputations, are known as blue-chip stock. These are the companies that tend to inspire others belonging to the same business.
Regarding blue-chip stocks, they usually have moderate growth but tend to be highly stable in return. They’re among the favourite choices for any stockholder trying to face the lowest amount of risk possible.
On the contrary, there’s the matter of penny stocks. This is the term given to the companies with the absolute cheapest stock prices, typically going around 1 dollar or less. While they might sound relatively attractive at first, they’re usually fronts to cover up schemes that can drain your entire investments.
To every single investor out there, your best advice regarding penny stocks is to avoid them in their entirety. They represent the utmost risk possible in the stock market.