There are two categories of stocks: Preferred stocks and Common stocks. Preferred stocks are similar to bonds; they provide fixed returns. Preferred shareholders are entitled to money in profitable times for the company and assets in case the company goes bankrupt. Preferred stocks generally have dividends that have to be paid out before dividends to common shareholders and the shareholders usually do not have voting rights. In short, preferred shareholders face limited risk and they are mainly interested in dividends. Very few companies offer preferred stocks.
As a result, most investors invest in common stocks. The greater part of investors is found in this category. Common shareholders face more risk than preferred shareholders, but they have more voting power and can elect a board of directors or vote on corporate policies at the annual general meetings. On average these shares perform better than preferred stocks over time.
In order to improve the knowledge of stock trading, there are five kinds of common stocks that need to be discussed: Growth, Income, Blue Chip, Value and Recurring stocks.
Growth stocks: Also known as Glamor stocks, these are stocks which are likely to hike in prices. They grow faster than the economy and sometimes outgrow the stock market itself. These stocks appeal to investors because they have nominal risk and over the long term they can provide a good profit. Most technology companies are growth stocks.
Income stocks:These stocks hand out a large part of its profits to investors. Income stocks pay up to 60% to investors as dividends. They are largely unaffected by the ups and downs of the market and investors are self-assured that they will receive dividends.
Blue Chip stocks:If you guessed that this name came from the poker game, you would be right. They have the highest values and are sector or industry leaders. Being big companies, they have been around for a long time and as a result have strong fundamentals. They pay regular dividends. Though their prices don’t grow very much, they are good options for the long term.
Value stocks:They are under priced stocks with high potential of growth. They sell below their real value, thus making them highly appealing to investors. One way of looking at value stocks is that they are stocks which can be bought at a discount and have the greatest potential to outperform the market. Investing in these stocks is focused on the long term and therefore they are best suited for retirement investing.
Recurring stocks:These are stocks whose performances are dictated by the changes in the economy. If the economy grows, so does the stocks and vice versa. Hence the best time to invest in recurring stocks is when the economy is on a rise.
Choosing the right type of stock to invest in is of paramount importance, and hopefully you will be able to do just that with the help of this guide.