Achieving financial success today is inconceivable without basic knowledge of fundamental invest...
Achieving financial success today is inconceivable without basic knowledge of fundamental investing principles.
One can hardly employ investment strategies if they haven’t dived into researching such significant securities as stocks, also known as equities or shares.
The stock market has been operating for centuries and is characterized by high volatility, which contributes to more significant income.
Stocks are broken down into multiple categories and classifications. For an aspiring investor, it’s crucial to distinguish between the different types of stocks available on the market.
This article outlines the most popular varieties of equities that are always in high demand.
Common Stocks vs. Preferred Stocks
A stock is a security that represents an investment in a company. A company has the right to sell the units of its stocks, called “shares,” which are generally issued as either common or preferred stocks.
Common Stocks
Сommon stock is widely considered the most popular stock to invest in, hence the name. It embodies the proof of partial ownership in a company. If the company dissolves in the future, the respective shareholders have the right to get a proportional share of the remaining assets’ value.
However, they will always be at the end of the line and will receive the remaining shares (if there will be any left) of the asset only when the holders of bonds and preferred stocks get theirs.
Theoretically, common stocks provide their owners with unlimited upside potential. However, there is a genuine risk of losing the invested money - in the event that the company ceases to exist without any valuable assets left.
Preferred Stocks
Preferred stock is a hybrid security that adopts common characteristics of both bonds and stocks. Even though the holders of preferred stocks don't own any shares, they receive fixed dividends.
The rate of dividend on preferred stocks is either a percentage of the nominal value of shares or an absolute number; it never depends on the company’s revenue.
To some extent, preferred stocks are similar to the fixed-income market, and this fact also makes them sensitive to changes in interest rates. That’s why this type of stock is attractive to investors only when the interest rates are stable or about to decrease.
Holders of preferred stocks obtain the pre-emptive right to claim ownership of the asset's part upon liquidation of the company.
These privileges don't come for free, as investors have to sacrifice their voting rights and are not eligible to participate in the company's management.
Preferred stock provides its holder with the right to get back a certain sum of money upon the company’s demise. Preferred shareholders are also the first to receive dividend payments; therefore, they are given an edge over common shareholders.
Classification of Stocks: Company Size
The words “large-cap,” “mid-cap,” and “small-cap” refer to market capitalization, which reflects the actual market value of a company.
The market capitalization of a company is calculated by multiplying the number of shares by a share price. Companies are usually divided into three groups by size:
Large-Cap Stocks
Shares of well-established and well-known companies with a market value of $10 billion or more are known as large-cap stocks. The net worth of such companies can exceed the economic capacity of some small countries.
The only downside of large-cap stocks is that their prices are stagnant, as it's pretty challenging to snowball when you are already an industry giant and lead the respective market.
However, they successfully compensate for this drawback by rewarding investors with a sustainable increase of share value in the long run. Here are a few examples of well-known large-cap companies:
Even though investors usually consider large-cap inputs less risky than small-cap ones, conducting thorough research before purchasing any type of stock is a wise decision.
Such financial vehicles as mutual funds diversify your portfolio and make it possible to invest in several large-cap entities at once. Thus, you don't have to spend much time researching individual stocks to make a safe investment.
Mid-Cap Stocks
The shares of medium-size companies with a market value from $2 up to $10 billion are known as mid-cap stocks. These businesses have promising growth potential, so investing in their stocks is less risky than in the equities of small-cap companies.
If you want your investment portfolio to be well-diversified, consider including some mid-cap stocks. Middle-size companies can seem stable, but it's never redundant to check their track record.
Small-Cap Stocks
The shares of ownership of small companies with a market value from $300 million to $2 billion are known as small-cap stocks. They have tremendous growth potential; however, such stocks expose investors to significant risks during economic downturns.
Small-cap businesses lack a reliable financial cushion to help them withstand business depression or bad management.
Growth Stocks vs. Value Stocks
Stocks can also be categorized by the investing style applied to them. The most remarkable equities from this group are growth stocks and value stocks.
Growth Stocks
Growth stocks represent companies that have the future potential to predominate the market. As the name implies, growth stocks never stop growing; once they do, they are no longer growth stocks.
If it happens, their share price usually abruptly drops unless the slowdown is considered natural for a maturing company.
Very few growth stocks pay dividends, so most growth investors are focused on the rapidly growing share prices.
Investors value growth stocks for their attractive growth rates, but there is always a chance that the stock price won't follow the company’s growth.
Value Stocks
Value stocks represent businesses that were misvalued by the market. Their stock price doesn't accurately reflect the actual value of the company. The reasons why these stocks were valued incorrectly may vary.
For example, value stocks may suffer guilt by association if other companies from the same industry experience a period of major challenges.
Investors buy these types of stocks, hoping that the market will someday realize the true value of a company and the stock price will increase.
Value stocks are used to implement a buy-and-hold strategy, providing that investors have enough patience to work it out.
Classification of Stocks: Location
Stocks can be grouped in accordance with the geographic location of a company. Therefore, diversification of an investment portfolio is possible through investing in domestic and international companies.
As for international bonds, you can take into account businesses based in emerging markets that are poised to expand.
US Stocks
Stocks of US companies are known all around the world. They are traded on various stock exchanges and range from the smallest public companies to industry giants, such as Intel (INTC) or Netflix (NFLX).
The most famous and largest stock exchanges in the United States are the NASDAQ, the American Stock Exchange, and the New York Stock Exchange.
Domestic stock funds in the United States enable their investors to operate within the world's most liquid stock market, thus providing them with a unique opportunity to purchase stocks of the most successful companies in the world.
Most US domestic stocks traditionally deliver beneficial returns on a risk-adjusted basis, representing key components of long-term investment portfolios.
When investors buy shares in a domestic stock fund, the invested money is used to purchase equities issued by the domestic businesses.
The purpose of mutual funds is to pool stocks of various companies, so investors don't have to bother buying stocks individually, which would be quite impractical.
International Stocks
International stocks, also known as foreign stocks, are the equities of companies that operate outside the USA.
Foreign stocks can be common and preferred, but they are always issued by international corporations with headquarters located outside the United States.
Foreign stocks trade worldwide on different exchanges; in the USA, they are traded in the form of ADRs (American depositary receipts).
International stocks serve multiple purposes. For instance, they can strengthen your portfolio by employing diversification or give novel avenues to the rapid growth of returns on investment.
The explosive expansion of international economies increased the productivity of enterprises worldwide, and overall improved living standards will eventually lead to the emergence of such a social phenomenon as a global middle class.
These discernible trends anticipate significant economic growth outside the USA. With this information in mind, investors should seriously consider allocating a portion of their portfolios to international stocks. ( Keep reading with LiteFinance)
