Wed, December 07, 2022

How to Choose from Various Types of Stocks

Stocks and investors

People hear about stocks on a regular basis. However, there are various types of them. So, it is desirable for investors to learn about the different types and to understand their unique characteristics. Let’s have a look at various stock categories to learn more about them. We can start with common stock.

It represents partial ownership in a company. Importantly, this stock class entitles investors to generated profits, usually paid in dividends. Investors should keep in mind that, common stakeholders elect a company’s board of directors and vote on corporate policies. They have rights to a company’s assets in a liquidation event, but only after preferred stock shareholders and other debt holders have been paid. 

Now, let’s learn about preferred stock. It entitles the holder to regular dividend payments before dividends are issued to common shareholders. As stated earlier, preferred shareholders also get repaid first if the company dissolves or enters bankruptcy. Nevertheless, preferred stock doesn’t carry voting rights and suits investors seeking trustworthy passive income. 

It is important to get more information about growth stocks. As the name implies, growth stocks refer to equities expected to grow at a faster rate compared to the broader market. Usually, they tend to outperform during times of economic expansion and when interest rates are low. 

On the contrary, value stocks trade at a discount what a company’s performance might otherwise indicate, typically having more attractive valuations than the broader market. 

Types of stocks and interesting facts 

 We can discuss other categories as well. For instance, income stocks, are equities that provide regular income by distributing a company’s profits, or excess cash, through dividends that are higher than the market average. In most cases, they have lower volatility and less capital appreciation than growth stocks, making them suitable for risk-averse investors who seek a regular income stream. 

We should mention blue-chip stocks as well. They are world-famous companies that have a large market capitalization. Interestingly, they have a track record of generating dependable earnings and leading within their industry or sector. 

The economy’s performance directly affects cyclical stocks. They typically follow economic cycles of expansion, peak, recession, and recovery. As a reminder, they usually display more volatility and outperform others in times of economic strength when customers have more discretionary income. 

Conversely, non-cyclical stocks operate in “recession-proof” industries that tend to perform reasonably well irrespective of the economy. They typically outperform cyclical ones in an economic slowdown or downturn as demand for core products and services remains relatively consistent. 

It is very hard to mention all types. Nevertheless, we have to mention defensive stocks. Usually, they provide consistent returns in most economic conditions and stock market environments. It is worth noting that, these companies typically sell essential products and services, such as consumer staples, etc. Investors should keep in mind that, a defensive stock may also be a value, income, non-cyclical, or blue-chip stock. 

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