One of the most important things when it comes to trading Stocks is learning how to pick the right ones to trade.
However, before we dig deeper into how to find the right Stocks, it’s important we show you that Stocks come in many different shapes and forms.
And different types of Stocks come with different privileges, different level of risk, and different profit potentials.
If you’re able to determine which kind of Stocks best suits your financial situation, skills and goals, you can find your niche in the multi-faceted world of stock trading and focus your efforts in the right direction.
And for that reason, it is important we introduce you to a number of different types so that you can decide what fits YOU best.
And according to what YOU want to achieve, you can find your niche in the world of Stocks, focus your efforts in the right direction and create a strategy that is suitable to your needs, risk tolerance, and financial goals.
Stocks can be divided into multiple categories using a number of different parameters such as the company size, ownership type, market cap, dividend payments, industry, risks and country.
Now, we know what you’re thinking.
That just sounds super complicated.
But we are here to make things crystal clear.
And in reality, it really isn’t that complicated.
Below, we will cover each one of these categories to guide you to a better understanding of the different types of Stocks.
The basis of ownership rules is the most common parameter for classifying Stocks.
This means that the given company will decide whether to offer common, preferred or hybrid stocks.
If you are new to investing in Stocks and only looking to buy a few shares here and there, you are very likely to invest in common Stocks, which are exactly what its name suggests. The most common type of Stock.
When an investor purchases a common share, they are typically also granted voting rights (typically one for each share) and a share in the organisation’s profits. Generally, the more shares an investor owns, the stronger the vote.
Prefered Stocks, also often compare to bonds, are the other main type of Stock.
And as the name suggests (again), preferred shareholders get a preferred treatment.
This mean that fixed dividends are paid to them and in the case of liquidation or bankruptcy, preferred stockholders will get their shares before common shareholders do.
They are usually bought by investors who prioritise income over long-term growth.
Hybrid Stocks , also called convertible preferred shares, come with an option to be converted into a predetermined number of common stocks at a specified time. Hybrid Stocks, however, usually do not come with voting rights like Common Stocks.
Another way to categorise Stocks is by the size of the company, shown in its market capitalisation or market cap. They vary from mega-cap all the way to micro-cap Stocks.
The market capitalisation, or market cap, can be calculated by multiplying the price of a Stock by the overall number of outstanding shares.
Generally, bigger companies that are more established, have a greater global exposure and therefore a significant percentage of the large-cap organisation’s profits comes from investors from around the world.
Meanwhile, smaller-cap Stocks tend to be less established, less well-known and therefore more domestically oriented. Investing in these type of companies can be risky but it also offers more growth potential.
Below, you can find a breakdown that gives some rough parameters on the ‘cap’ sizes.
Micro-Cap: $50 -$300 million
Small-Cap: $300 million – $2 billion
Mid-Cap: $2 billion – $10 billion
Large-Cap: $10 billion plus
Mega-Cap: $200 billion plus
Stocks can also be categorised by the style of investing.
These categories usually differ in the way the Stocks are valued and how companies make their money.
Value Stocks are shares that are being sold for a price lower than their actual worth.
Investors believe that by buying companies that are priced low, they can profit as the gap narrows over time.
Growth Stocks are shares in organisations that are growing at a fast pace and/or are expected to continue its growth at a faster rate than its competitors.
Stocks are often grouped by the industry that that organisation falls within. There are eleven recognised sectors and these include:
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Stocks can be classified by the country or region in which its headquarters are, even if the company operates globally.
Investors looking to buy shares in International Stocks can do so with ETFs, which hold numerous foreign companies within a single share.
EAFE , which stands for Europe, Australasia, and the Far East is a common index used for international Stock funds.
These countries are all developed, which means they have established financial markets and mature economies.
Emerging-market stocks refer to the companies whose headquarters are in countries whose economies are described as developing. These include countries such as India, Mexico, Brazil or Philippines.
Investing in emerging markets is believed to be riskier, but it also provides an opportunity for high rates of growth.
Some Stocks are riskier than others. However, this doesn’t mean that they should be avoided. The risky ones especially have the potential to make you great profits.
The Blue-chip Stocks are the shares of well-established companies with stable profits. Investing in these companies is often considered to be the safe option. They are named after blue-coloured chips in the game of poker, as they are considered to be the most valuable.
Beta Stocks are shares in ‘risky’ companies. However, investors believe that the riskier the share is, the more the price fluctuates and therefore the greater the potential to make profits.
And that’s it in a nutshell.
It may not seem like a nutshell, but it really is.
And now that you know the different types of Stocks, you can use your knowledge as you plan for your future investments.
Investing in organisations of different market cap, location, and investing styles contributes to a well-balanced portfolio and improves your chances for success.
At the end of the day, when investing in Stocks isn’t necessarily about its category, but whether you believe in the company’s long-term growth potential.
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