The stock market is not complete without its stocks. The stock market is a place where you can buy, sell, and choose stocks, just like a market. And since you’re just starting out on your journey, you have to learn the basics first, such as investing terms, in order to become a successful investor. After all, you wouldn’t learn how to ride a bike without putting your training wheels first.
When a company is just starting out, the only shareholders are the founders and early investors. For example, a company has two founders and one investor. They will become partners and may own one-third of the shares. As the company grows and needs more capital for expansion, it may issue more shares to other investors. The founders would end up with a substantially lower percentage of shares than they started out with. Usually, these shares are private and they are not easily exchanged, as the number of shareholders is minimal.
However, this company would come to a point where early investors sell their shares and monetize the profits of their early investments. During this phase, the company itself may need more investment than the private investors can offer, which are relatively small. This would be a great time to transform into a public company and do an initial public offering (IPO).
This is where the stock comes in. A Stock represents ownership of a company. If you invest and own a stock, you actually own a portion of that company. You have the right to attend the shareholder’s meetings, vote on company decisions, and the right to collect a share of any future company earnings.
Every stock has its own pricing. Every day, prices fluctuate each day depending on trading. If stock owners begin selling a stock, and no one is willing to buy, the price would go down until buyer demands increase to meet seller supply.
On the other hand, if potential investors want to buy a stock, and none of the current stock owners are selling, the price will rise.
Now that you know about stocks, it’s time to understand the type of stocks before buying one. There are things to remember when picking stocks, especially since they have their own different types and classifications that are used to group stocks together.
Just like how the name implies it, it’s common. When you hear people talk about stocks, they are typically referring to common stocks. This type of stock represents ownership in a company and a claim on a portion of that company’s profits, or dividends. Investors also have the right to vote to elect board members. Additionally, issued in this form are the majority of stocks.
Common stock can yield higher returns than almost all other common investment class. However, this higher return comes at a cost. Since common stocks are riskier, there is a potential to lose the entire investment if a company goes out of business. If this happens, common stockholders will not receive money until the creditors, bondholders, preferred shareholders are paid.
This type of stock represents some degree of ownership in a company, but usually doesn’t come with the same voting rights. A fixed dividend is guaranteed to investors, unlike common stock that is never guaranteed due to variable dividends.
Further, a preferred stock doesn’t usually go with the same appreciation or depreciation in stock price, and this could result in lower overall returns.
A preferred stock has one advantage over a common stock. When a company goes out of business, preferred stockholders are paid off before the common shareholder.
Income stocks come from stable companies that pay large dividends. These are most preferred by older people who are retired. It provides them with a steady income in the form of dividends. If the dividend payments are combined with the appreciation in stock price, these stocks provide investors more money than they can earn by investing in bonds or other fixed income investments.
But a higher return means a higher risk. The stock price can potentially fall if there is a market downturn.
Income stocks have a very low volatility, a dividend yield higher than prevailing 10-year treasury bond rates, and a modest level of annual profit growth.
They can come from any industry, but most commonly found in companies operating within real estate, energy sectors, utilities, natural resources, and financial institutions.
These are stocks of the largest companies in the country. These are successful companies with years of solid profits and steady dividend payments. You can consider them as the safest stocks to invest in.
Though dividend payments are not necessary for a stock to be considered a blue-chip, most blue-chips have records of paying stable or rising dividends.
Companies that are large and have stable investments don’t have much room to grow. This would result to steady stock prices, but less upside for investors.
While blue-chip companies are stable, there are times when even the best companies struggle during periods of extreme stress. They are not always safe.
You can find blue-chip stocks on the most reputable market indexes or averages, including Dow Jones Industrial Average, the Standard & Poor’s 500 (S&P 500), and the Nasdaq-100 in the United States, the TSX-60 in Canada, and the FTSE Index in the United Kingdom.
Learning these types is a great way to advance further on your journey to becoming a successful investor. But it doesn’t end here yet. There are still a lot of types and classifications to cover. If you think it is tiring on why there are so many types, take it slowly and start small. A great investor must have the discipline, passion, and patience to achieve his or her goal. Any ordinary person can enter the investment game, but only the boldest can become the victorious.
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