Investing your hard-earned income is one of the best ways to secure your financial future. Before you start investing in stocks, it is essential to know the different types of stocks available to you. Here is a list of different ways we can categorize stocks.
1. Common Stock
Common stocks are your ordinary run of the mill stocks. Every time you hear someone refer to stocks, they probably refer to stocks. They are most likely referring to common stocks. Common stocks give you, the investor, partial ownership of a company. In essence, you own a specific portion of a company and are entitled to a proportional share of the value of any remaining assets should the company get dissolved. However, the investor stands to make a loss should the company dissolve without any valuable assets left.
In addition, investors earn regular dividends and gain capital appreciation as long as the company is making profits. Most stock recommendations are common stocks.
2. Preferred Stock
In many ways, preferred stock is similar to common stock, with a few exceptions. Preferred stocks give shareholders a preference over ordinary shareholders. They get back a certain amount of money when or if the company dissolves before common stockholders. Preferred stockholders also receive their dividends before common stockholders. The only catch is preferred stock is offered at a higher price compared to common stocks.
Another way to categorize stocks is by where they are located. Most investors focus on the location of the company’s headquarters. It is important to note that the company’s headquarters are not necessarily where it makes its sales. You should make your investment in the state or country where the company makes most of its money for you to make the most profits. International stocks are also a great way to spread the risk of making losses from bad GDP in your home country.
4. Growth Stocks and Value Stocks
This categorization method distinguishes between two common investment styles. Growth investors are more focused on companies that are seeing their sales and profits rise quickly. Value investors are usually looking for the cheapest stocks that can generate a decent income over time. Growth investors often face more risk compared to value investors.
Value investors look at the price of stocks relative to peer stocks or compare current stock prices to previous stock prices. On the other hand, growth investors are looking for a company that is rapidly growing with the backing of equally growing demand for products and services. These investors realize that without a steady demand, supply is futile. They are also hyper-vigilant of the market, often selling their stocks when they predict issues in the near future.
5. IPO stocks
IPO stocks are stocks belonging to companies that have gone public in the near future. Initial public offerings often get investors excited. This is usually because it represents a chance for the stock prices to grow exponentially. IPO stocks are usually stable but can be volatile because not all people will agree on the growth and profitability prospects of the company in question. Most companies often overestimate their future profits and growth rate by underestimating severe risk factors. Some companies deliberately overlook pitfalls in their growth paths but don’t get away with it often.