Understanding The Different Types Of Stock

For beginners, one of the most difficult aspects of understanding stock investments deals with the various types of stock. There are several different types of stock to choose from.

Income stocks are issued by companies that are stable. The company will not usually reinvest a large amount of their profits back into the company each year. The profits are instead distributed to the shareholders in the form of a dividend. If you want dividend income and capital appreciation, you should look towards income stocks. But remember that dividends will be taxed. Plus, the dividend could go higher or lower each year.

Growth stocks are issued by companies that are looking to grow and expand. There is usually no, or very little, dividend income from growth stock. Many of the companies are just starting out in the business world and are actively reinvesting their earnings into their companies. Most advisors consider growth stocks a good choice for those looking to make a nice return over a long period of time. Annual returns usually run around 11% over ten years. The idea is that growth stocks will grow given time.

A value stock is a stock that has gone down in price. It is usually considered to be a good buy. Value stocks are based more on the company’s assets than the earning potential. The growth of the company isn’t the issue at hand with a value stock. Investors buy value stocks for shares of a solid company at a good price and that in time the price will reflect the stability of the company. Then the price of the stock will go up.

Speculative stocks are like the new stocks on the block. They are the riskiest stock available. You can either make a lot of money or lose it all quite easily. You have to gauge your own risk level. These are usually brand new companies or unknown companies. This category would include all those dot-coms.

Preferred stock happens when a company issues different classes of stock. The company could have a common stock and then have a preferred stock. The preferred stock has a higher claim to company earnings, such as dividend payments. The amount of the dividend payment is fixed, unlike the common stock, and will be paid before common stocks are. If you own a preferred stock in a company that isn’t doing well, you will still get your fixed payment. You will also share in the assets in the case of a bankruptcy before those holding common stock will.

These are the most commonly thrown around stock types. You have probably heard of them around the water cooler at work or on the news. There are several other types of stocks that are also available, including convertible preferred stocks and blue-chip stocks. It is essential that you understand the different types of stocks when looking to invest. They all have different benefits and drawbacks. What type of stock you invest in depends on what you want to see from your investment. Are you looking for a quick way to make a lot of money? Or are you wanting to invest money and simply let it grow over time? Ask yourself these questions when looking at what type of stock works for your financial goals.

There are so many different types of stock out there that many first time investors have a hard time choosing their investments. Most simply turn to the advice of someone they trust. This isn’t a bad idea, but you should also take the time to learn about the different stocks for yourself. After all, this is your money.

In part one of this series, we talked about some basic types of stocks: growth stock, value stock, speculative stock and preferred stock. Let’s move to some more complex stocks.

Convertible preferred stocks start off as preferred stock, but it can be converted into a common stock. Because of this, convertible preferred stock will react to the growth of the company more than a regular preferred will.

A cyclical stock is paired rather closely with what is happening in our country’s economy, and sometimes even in those overseas. You will see steel companies and original equipment manufacturers. It takes a bit of financial knowledge to be able to trade in cyclical stocks. You must also take the time to watch the economic indicators. You will usually see these stocks rising with growth. If the economy isn’t doing well, you won’t see the earnings you desire.

All of the Cap stocks stand for capitalization stocks of different sizes. The different sizes equal different returns, in general. Micro-caps are companies with $100 million or less in revenue. Small-caps are companies with revenues between $100 million and $500 million. The majority of publicly traded companies are small-cap. Mid-caps are those with revenues between $500 million and $3 billion, while large caps top $3 billion.

Blue-chip stocks are the largest cap stocks out there. They are the top of the pile. You have to know that all blue-chip stocks are large cap stocks, but not all large-cap stocks are blue-chip. There are a lot of advantages to blue-chip stocks, including liquidity, earnings and staying power.

You can also purchase non-U.S. stocks through American depositary receipts. Though that is probably beyond a beginner’s level of investing.

When it comes to investing in stocks, the type of stock you invest in is important. Take your time in assessing what you want to get out of your investment. What type you choose depends on your financial goals and personal risk level. Look for stocks that perform to your investment standards. If you want a lot of quick growth and don’t mind the risk, perhaps you want to put some money into a speculative stock. If you want something solid that will give you a dividend no matter the future performance of the company, you might want to shop for preferred stock.

The key is in knowing the pros and cons. You have to understand the risk. And they all have risks. Remember, if you choose wisely and invest for the long haul, the stock market is an excellent place for your money to grow. All it takes is time and knowledge.

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RateEmpire, an internet consumer banking and mortgage marketplace that connects consumers with multiple lenders that compete for their business. RateEmpire is a destination site of personal finance, investing, taxes and mortgage rates. RateEmpire also operates a financial portal #1 Mortgage Refinancing and #1 American Home Loans.