This week we continue our education with investing in the stock market. There are many options regarding the types of stock to invest in. Today you will be introduced to the different stock types and classifications. Let’s see how much you know…
Stocks typically take the form of shares as either common stock or preferred stock. Common stock is the basic stock a corporation issues. It shows that you own a fraction of the company. Common stock owners are issued their dividends or profits after the preferred stock because there is a higher chance of a making profit.
Preferred stock has a higher claim on the assets and earnings than common (ordinary) stock and paid fixed dividend payment. The stockholder has priority over common stockholders on earnings and assets in the event of liquidation, give up their voting rights, and have less potential for appreciation compared to common stockholders.
Stocks are classified by the type of company that distributes shares of common or preferred stock. Below are the common stock classifications:
Blue-chip stocks generally refer to companies that have a long history of growth and stability, expected to pa regular dividends, companies that you would hold for long terms, such as Coca Cola and Gillette.
Growth stocks are relating to entrepreneurial companies experiencing a faster rate of growth than their sector. They are generally identified by lower dividend yields and are commonly involved in acquisitions of other companies (company takeovers).
Income stocks are shares in companies that historically pay larger dividends compared to other types of stock. This type of stock can be used to generate income without having to sell the share.
Penny stocks, also known as Micro Cap Stocks, generally are defined as a stock trading under $5.00, usually less than that. They tend to be fairly volatile, significantly rising and falling in value in very short spaces of time.
Small Cap Stocks refer to stocks with a relatively small market capitalization generally it refers to a company with a market capitalization of between $300M and $2.0B. One of the biggest advantages of investing in small-cap stocks is the opportunity to beat institutional investors.
Mid Cap Stock refers to companies with a market capitalization between $2 billion and $10 billion.
Large Cap Stock is a term used by the U.S. investment community to refer to companies with a market capitalization value of more than $10 billion. The important consideration for value investors is not so much market capitalization of these types of stock, but trading volume and liquidity.
Cyclical stocks are stocks that rise quickly when economic growth is strong and fall rapidly when growth is slowing down.
Defensive stocks are really the opposite of cyclical stock as they tend to maintain more of their value during economic downturns. Think of the staples that people will always need like food, insurance and pharmaceuticals and you will be able to identify this type of company.
Now that you have been introduced to the classifications of stocks, your homework is to research company names for each classification. Next week we will continue this series with beginners’ tips and strategies to start investing in stocks.
Remember our goal is to get Financial F.I.T. (Focused, Involved to Transform your life).
Until next week,