Stock means the ownership that someone has in a company. It is a certificate that proves your ownership. It provides the stockholder or the owner with a certain right to the profits and assets of that company. Investors buy stocks in a company which results in the rise of capital funds of the company. So, it is the investment in a public company.
There are several kinds of stocks. Let us have a look at some of those.
Stocks are mainly of two types. These are common stocks and preferred stocks.
Common Stocks: Common stocks are just like it sounds. When we say stocks, most of the time we mean common stocks. Most of the stocks that are issued are this kind of stocks. Along with showing someone’s ownership in that company, common stocks represent a claim on some parts of the profit of that company. It gives the shareholder (The person having some share of the company because he bought some stock of that company) the right to vote. They get the ability to be a part of the decision-making team of the company. The owners of the common stocks earn a dividend. A dividend is a certain amount of money paid to them regularly. Although this amount is not constant. It changes depending on the profit of the company.
In common stocks, the owners get the chance of getting higher returns compared to any other types of stocks. But it also comes with some disadvantages. The common stocks involve the highest amount of risks among all kinds of stocks. So, this kind of stock is highly unpredictable as the amount of return can increase or decrease at any moment at any per cent.
If the company you have invested in goes through a high-profit margin for a certain period, your return will be very high and will bring you much profit. On the other hand, your profit can come down drastically in case the company you invested goes bankrupt or faces a huge loss.
So, this stock is suitable for someone looking for a long-term investment. That is because if you face a loss at some point you will still have the chance to compensate for the loss in future with some good amount of profits. As far as short term investment is concerned, the common stock does not offer the best of options. The reason is the volatility of dividends and stock price.
Preferred Stocks: This kind of stocks come with ownership of the company but without any voting rights. Although the owners of the stocks get a certain dividend all the time. The amount of money that the owner gets regularly in preferred stocks does not change over time, unlike the common stocks. It does not matter if the company is in loss or making a huge amount of profit. So, the main difference between these two stocks is “promised dividend payments”. That is why preferred stocks are better for someone looking for a fixed income.
But at the same time, the chance of a large amount of income is not possible in this kind of stock. That is because even if the company they have invested in made a huge amount of profit at a particular time, they will not get the share of that profit. Moreover, it is not suitable for long-term investment and since they have no right to vote, they are not included in the decision-making team. This is possible for the common stock.
Still preferred stock is better for someone who does not want to take much risk with a decent amount of dividend for a certain period because the share price is not much volatile. In this way, although there is no high return is involved, you will not be losing profit either.
These are the main type of stocks. However, there are other ways the stocks can be categorized.
Penny Stocks: Penny stocks are the kinds of stocks that come with the possibility of high profit and high risk. These are considered to the low-priced stock. At the same time, this is the riskiest type of stocks. It can bring a huge amount of profit at a very small amount of time. Penny stocks can change your fortune quickly. Many times, it can be the exact opposite. You can lose everything you have invested very quickly. These stocks start from as less as 2 cents per share and can go up to $5 a share. So, it does not need huge investment but is very risky since you will not be investing in a profitable but potential company. Penny stocks are mostly issued by start-ups. There are more chances of failing to succeed in these cases. That is why you should invest the amount of money in penny stocks that you can afford to lose without much problem.
Small-cap, Mid-cap and Large-cap Stocks: Stocks can also be divided depending on the market capitalization of the company you have invested in. That means the stocks are divided depending on how valuable the company is. Companies that have a market capitalization of $10 billion or more are the large-cap. Companies with a market value of $2 billion to $10 billion are the mid-cap and those with a market capitalization between $300 million and $2 billion are the small-cap. The larger the organization, the lesser the chance of failing or losing money. But this is not true every time as the smaller companies can also see substantial growth in a quick time.
Growth Stocks: These stocks apply to the companies that are seeing a positive cash flow and positive growth. These companies are predicted to have high profits and expanding rapidly. So, it includes the newer and growing companies mostly. Their stock prices are higher as these companies are growing and get huge attention at that time. This is a good option for long-term investment. The investors can have a higher return as long as the companies are growing and the stocks can be called growth stocks.
Blue-chip Stocks: These kinds of stocks apply to the shares in a well-established and secure company. These companies always tend to be in profit and are financially secure. That is these are the least risky companies to invest in. You see slow growth but can have the security of getting a steady income. Even at a time of economic slowdown, blue-chip stocks provide security of a certain amount of income. Since they are the big and popular companies it is easy for them to turn the losses in profits quickly. This stock is a better option for someone looking for a steady source of income with less risk.