There are many types of stocks which can be invested in based upon your financial position, your risk comfort level, and your investment goals. In order to determine which type to invest in, you have to first determine what you want the stock to do for you. Do you plan to hold the security long-term, or are you a day trader? Are you looking for capital gains in your investments or is income your main objective? How you answer these questions will give you a good idea of which type of stock you should be considering for your portfolio.
A company’s stock offerings generally fall into one of two categories: common stock or preferred stock.
Common stock represents the basic equity ownership in a corporation. For total return (dividend income and capital gains), no publicly traded investment offers more potential over the long term than common stock. Stockholders are entitled to vote for directors and other important company matters. They also participate in the appreciation of share values and in any dividends declared from corporate earnings that remain after debt obligations and preferred stock dividends are met.
Preferred stock is an equity which has characteristics of both bonds and common stock. Because it is not debt, however, it still carries more risk than bonds. The dividends on preferred stock are usually a fixed percentage of the par, or face, value. Thus, like bonds, shares are sensitive to interest rate fluctuations. Prices go up when interest rates go down, and vice versa. Preferred dividends are not a contractual obligation of the issuer, however. Although, they are payable before common stock dividends, they can be skipped altogether if corporate earnings are low. Also, if the issuer goes bankrupt, though the claims of preferred stockholders come before those of common stockholders, neither will share in any liquidated assets until bondholders are paid in full, because bonds are debt.
Listed below are several types of stocks which are commonly traded in the stock market:
- Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. The name comes from the blue-coloured chips in the game of poker, which are typically the most valuable.
- Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i.e. outside of one of the major exchanges.
- Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that will gradually grow over the years as a way to offset inflation.
- Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment.
- Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company.
