If you’re a beginner in the stock market and want to invest, it can get a little difficult on which stocks to pick. Obviously, all of them differ. They are divided into types, and each has their own classification.
One bad investing mistake is buying stocks that you are not familiar with. You will surely regret it later on, and worse is that you will lose a lot of money.
Investing is a dangerous game. You need to learn the basics, conduct a research, and formulate a plan. These are only a few strategies when it comes to investing. If you’ve done this right and managed to follow your strategy, you can become a successful investor. It is only up to you whether you have the determination to achieve your goal.
A very good strategy to avoid some mistakes is to understand the different types of stocks. This will help you choose which to buy as there are countless of them to pick. You will be more confident when picking, rather than get confused.
This is the 2nd part of our discussion about the types of stocks. In the first part, we covered about Common Stock, Preferred Stock, Income Stock, and Blue-Chip Stock.
If you haven’t read the 1st part, check it out: Types of Stocks in the Market (part 1)
If you’re ready, let us tackle other types of stock and what makes them different from each other.
These are the stocks of companies with profits that are increasing quickly. The increase in profits reflects the rise in the company’s stock price.
Growth stocks do not usually pay dividends, as some companies would prefer to reinvest retained earnings in capital projects. If you want to take on the risk, choose stocks based on the potential for capital gains, and not dividend income.
A good example of growth stocks is technology companies. Investing in this type of stock will make you rely on the company’s success, which can be very risky. This will help to generate a return on your investment.
Stockholders may end up losing money if the company’s growth is not what was expected. Remember that market confidence wanes and share prices drop.
This type of stock tends to trade at a lower price relative to its dividends, earnings, and sales. The common characteristics of these include a high-dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio.
These are underpriced when compared to other companies in the market. This is a result of a possible distress or financial problems. Sometimes, this happens because of investor behavior and cyclical trends.
Consider that a value stock is riskier than a growth stock. The reason behind this is the skeptical attitude the market has towards a value stock. Typically, a value stock is more likely to have a higher long-term return than a growth stock due to the underlying risk.
It is a good idea to take a look at factors beyond the relationship between price to earnings and book value. Investors will evaluate first the company leadership and other qualitative factors before buying.
These are the stocks of companies that have small or no earnings, or varying earnings. However, they hold great potential for appreciation because they are tapping into a new market, operating under new management, or developing a lucrative product. This could make the stock price rise if successful.
Back then, many speculative stocks had large market capitalizations. Yet, several of them had virtually no earnings. Since then, some of them imploded to become major corporations.
Speculative stocks are traded frequently by investors, hoping to make a profit by timing the market.
These are the stocks that cycle with the economic cycles. They mostly go up when the economy is growing, but decline when the economy does so. Most of the time, they relate to companies that sell discretionary items consumer can afford.
Some can predict the movement of the stock prices, leading the investors to time the market. They would buy these at the lowest point in the cycle, and selling them at the highest point.
Examples of cyclical stocks include automakers, furniture retailers, airlines, clothing stores, restaurants, and hotels.
So when the economy is healthy, people can afford to buy cars, renew or upgrade their home furnishings, shop, and go travel. On the other hand, if the economy is poor, people would cut these expenses first.
If everything gets worst, cyclical stocks will be worthless as companies go bankrupt.
Small-cap, Mid-cap, Large-cap Stocks
Some stocks are categorized by their market cap, or market capitalization. Small-cap companies are valued at less than $1 billion; Mid-cap companies are at $1 – $5 billion; and large-cap companies are greater than $5 billion.
Small-cap companies have the greatest potential for growth. Mostly, these are growth, speculative, or tech.
Mid-cap companies range from the top of the small-cap to the bottom of the large-cap stocks. Baby Blue-chip stocks are mostly Mid-cap stocks. These are like Blue-chip companies, but these have consistent profit growth and stability. They have low levels of debt, but smaller in size than large-cap Blue-chip companies.
Large-cap stocks are Blue-chip, Income, and cyclical stocks. They are large companies with a little potential for growth. Earning of capital gains is done by buying these stocks at the bottom of a business cycle, and selling them when the economy is at its peak. They have the best price stability and less risk.
Risk and return are hugely significant when it comes to these stocks. Small companies have fewer resources available, and have not established themselves in the stock market. Thus, they are riskier than large companies.
However, increased risks for small companies mean higher returns than Large-cap and Mid-cap companies. That is why many investors choose to invest more in small-cap or mid-cap companies despite the increased risk.
These stocks are explained briefly to give you an overview of all the types. If you need to focus more on a specific stock, spend a lot of time on it, so you could develop your strategy and to improve your game in the market.
Who knows? Maybe you could be the next investor legend who can dominate the financial world. No one could ever tell the future. But with a lot of hard work and dedication, you can make your vision happen and achieve your goal.
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