Smart Investing: Learn the Most Important Types of Stocks

Despite the global pandemic, in November of 2020 total market capitalization of the stock market reached $95 trillion.

This surpassed levels from before the COVID-19 epidemic even occurred. With the stock market so strong and buoyant, do you know how to invest? With online applications, this is now easier than ever if you know what to buy.

Read on as we discuss the types of stocks available. 

Common Stock

A common stock gives you partial ownership of a company. When you pay for your shares, you take on a percentage value of that business. The better the business profits and outlook, the more the value of that stock will rise. 

Of course, it can also fall should the company get into difficulty. Luckily, with common stock shareholders also get the right to proportional assets should the company be dissolved. Most companies will only offer common stock. 

Preferred Stock

Both common stock and preferred stock are similar. However, they have one fundamental difference. Preferred stock owners will get a fixed dividend and preference over common stock owners when claiming back money if a company dissolves. 

In addition, they also get any dividends before common stock owners do. This means it takes on more of a fixed bond investment criteria. This stock is less volatile but also has less chance to make gains. 

Cap Stocks

Cap stocks come in small, mid, and large sizes. This is a very fluid way of categorizing stocks by the size of the company they represent. The total value of all their shares is known as market capitalization. 

For example, the shares in Netflix have a huge combined value and will have a massive market capitalization. This would make them a large-cap stock. Small startups that have just put their company on the stock market would have much less and be known as small-cap stocks. 

Growth and Value Stocks

Growth and value are other ways to categorize stocks. Each one will suit a particular type of investor, which we will discuss in more detail below. 

Growth stocks have huge demand amongst buyers. They are often companies that have a product or service currently in vogue or topical. Their potential for growth is very strong. 

The downside is that these trends can change quickly. Increased competition can mean that the market share is easily stolen. You can often find that as an unproven company, even a small scare in share values can send it plummeting. 

Value stocks are safer, long-term options. They come from established companies that are leaders in their sector. As they have already proven their model works, small dips in the value of the company do not result in huge losses and they remain a safe bet. 

Dividend and Non-Dividend

When you buy shares in a company, certain firms will pay a dividend on their stock. This is a percentage of the profit for that year or quarter, depending on how much of the company you own. However, not all stocks will pay dividends. 

This does not make non-dividend stocks less valuable. They can still appreciate and add value to your money. You just don’t get the regular payout dividend stocks do. 

Domestic or International

Another way to categorize stocks is if they are located domestically or internationally. It is perfectly acceptable to invest in countries outside your home. However, some countries may have restrictions or limits. 

Just because a country has its headquarters and stock in a country, does not necessarily mean that is where the majority of its income comes from. Some companies may sell products abroad or internationally. 

How to Choose a Stock

Choosing the right stock comes down to your belief in the long-term potential of a company. After this, it all comes down to how it fits into your investment portfolio. 

Famous investor Warren Buffet said that you should never invest in a company you do not understand. This is a good adage to stick with. Without knowing how a business works, you have very little knowledge of its potential for growth. 

Do some research on stocks and shares you know a little about. Look at the history of the company, including its financial data. If you can see possible growth, then invest. 

Another way to choose stocks is according to your portfolio. You should always aim to diversify. This means losses in one area will be bolstered by gains in others. 

With so many stocks and companies, it is easy to diversify your investments. For example, if you already own real estate, then don’t invest in REITs and property firms. Instead, look at other areas such as technology or commodities.

Three Investor Types

Once you have stocks chosen, you need to decide what type of investor you are. These generally fall into three categories. 

The first is the buy-and-hold investor. They buy shares for the long term, claiming dividends and watching the value rise over time. Usually, they target small growth low-risk companies. 

Another type of investor is the one that opts for zero risk. They will invest in companies that are already doing well, usually blue-chip corporations. While these companies will hold value in good or bad times, they often have a high level of entry. 

The final type of investor is the one willing to take a risk for the most gains. They will go for initial public offerings and companies in their early stages of growth. 

Types of Stocks Explained

Now you know the types of stocks, create an investment plan. Then, decide on a budget for investment. After this, think about the type of investor you are and find the right stocks. 

If you need help with investing, then speak to the team at RVW Wealth. We provide resilient investing for turbulent times. Contact us for a consultation and see how we can manage your money.