If you are planning to invest in stock, keep in mind that the two main types are common stock and preferred stock. Nevertheless, if you conduct some research and findings, you will also learn about other different types of stocks available to purchase. This is very important because it will enable you to understand completely every hidden part of stock investment.
Stocks are shares sold in different companies or stock markets. Investors purchase them in units or large quantities and become shareholders in a company. This entitlement gives them right to ownership and decision-making.
Are all types of stocks the same?
Generally, Stock investing is risky just like every other investment but there is always a way of managing every investment risk. That is why if you are just starting you need to acquire enough knowledge before starting.
Some types of stock are more risky than others while some can make the most money compared to others. For instance, since the goal of every investor is to make profit they would want to purchase the stock that makes more money.
Note; those stock that makes more money comes with higher risk but do not be discouraged by the risk instead seek to know how to handle it.
In our previous article, we explained what stock is and how to invest in stock. In this article, you will learn the different types of stock available to enable you to become acquainted before investing.
1. Common stock
Common stocks also common shares are typically those stocks that most investors purchase from companies or the stock market. Just as the name implies it is the regular type of stock that comes to mind as soon as you plan to invest in stock.
Investors who purchase these stocks are entitled to voting rights. This means they can elect from the shareholders, members to act as the directors of the company.
Common stock has many advantages over other stock and this is one of the reasons why it is more ordinary compared to others. For instance, it is a publicly traded asset and any investor who wishes to trade on common stock has the opportunity to do so.
The investor can make purchases through a stockbroker while investors gain income from dividends and capital gain. Common stocks generate income at a high rate but also come with a lot of risk
2. Preferred stock
According to Oxford Languages dictionaries, Preferred stocks are stocks that entitle the holder to a fixed dividend, whose payment takes priority over that of ordinary stock dividends.
We can categorically say that preferred stock is the opposite of common stock where investors have some degree of ownership in a company. First, it does not give shareholders the opportunity for voting rights. This means investors have minimal or no right to vote and make decisions.
However, as the name implies it gives preferential treatment to its holders in terms of dividends. That is why most investors are more akin to it.
Again even if the company record a considerable loss or bankruptcy they are sure to get priority treatment when paying dividend. Preferred stock is less risky compared to common stock.
3. Large-cap stock
There are some types of stock that investors would rather choose to purchase due to its stability and how less risky it is. They are large-cap stocks; they are traded in a well-established, financially stable company with a market capitalization of $10 billion or more.
Due to their renowned history of stability and capitalization, they are considered safer investments because they can withstand any financial downturns. Investors who purchase these stocks are more conservative in risk tolerance although they may witness less market volatility.
4. Mid-cap stock
Just as the name signifies, mid-cap stocks, are traded in companies whose market capitalization ranges from $2 billion to $10 billion. They occupy a space between large-cap and small-cap. This means they can still expand the opportunity for potential growth of increasing revenue.
Investors may otherwise prefer to purchase this stock as it is less risky than small-cap stock. Although its opportunity to expand growth makes it riskier than large-cap stocks, as time goes it can develop into large stocks. This is if they perfume well.
5. Small-cap stock
Small-cap stocks are companies whose market capitalizations are below $2 billion. Due to its low capitalization, it comes with some shortfalls like:
– It may downsize in times of price fluctuation and economic instability.
– Low capitalization presents it as a high-risk stock but if it performs well it has the advantage of higher potential reward.
– Since they are small-cap, they are less recognized compared to large and mid-cap stock companies.
They may have less or limited resources to compete with their larger counterparts. Notwithstanding all these, they still have growth opportunities.
6. Growth stock
With growth stock, a company’s stock is expected to increase its market value faster and above other companies trading within the same asset range. The increase is estimated to generate higher revenue resulting from non-dividend payments and reinvestment of profit.
This means that companies who trade on growth stock do not pay dividends to stockholders. Hence investors who wish to purchase growth stock can only earn from the sale of stocks.
Growth stock can be risky to investors, hence if the company performs poorly investors may lose. Yet investors are willing to purchase this stock due to its huge return.
7. Value stock
Value stock tends to be slightly different in meaning from growth stock. They are stocks trading below the company’s market price which does not compromise with the company’s worth.
Investors may prefer to purchase this stock because it offers them the opportunity to grow their investments. On the other hand, a thoughtful investor may wonder the reason for a low market price. Thus this could pose a concern and may turn out to be risky.
The difference between growth stock and value stock is that growth stocks favours the company while value stocks favours investors.
8. Foreign stock
Foreign or international stocks are traded outside the country, not where the investor resides. With this type of investment, you get to understand the difference between your country’s stock trading and that of another country.
This investment is usually designed to help diversify your portfolio and widen your knowledge of the global stock market. Aside from market volatility which poses a threat to most types of stock, high cost of currency and exchange rate may also be a risk.
9. Individual stock
Individual stocks represent stock ownership in a company. An investor who purchases an individual stock will not gain full but partial ownership of such a company.
This is because the investor purchase just one stock which seem a little investment compared to investors who purchase more than one. Companies pay dividends to individual stockholders depending on the company’s profit.
Investors may likely not purchase this stock as it can be more risky compared to common or preferred stock. This is due to factors surrounding its performance in the stock market like daily market fluctuation that affects earnings.
10. Dividend Stock
Divided stocks are traded in public companies that have stable earnings and huge profits. These companies pay out profits as dividends regularly to their stockholders.
While the investors enjoy stable earnings from their investments. Just like every other stock with risk, dividend stock also has its risk like the general market fluctuations and management risk.
Conclusion
If you have read through this article, you will observe three important tips to keep as a reminder. The first is getting yourself more acquainted with the various types of stocks available.
The second is understanding and pointing out the risk each has and knowing where your risk tolerance level fails.
The third is using diversification and long-term strategy as a means of tackling risk and reaching your financial goals. Then conclusively, staying informed about your industry trends, wraps it all.
