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What are the different types of stocks you can invest in?

What are the different types of stocks you can invest in?

What are the different types of stocks you can invest in?


The stock market can be an intimidating place for new investors. Between the financial jargon and market volatility often thrown out by commentators, it can be hard to know where to start a stock. Fortunately, stocks are not as complicated as they seem, and while there are many different classes of stocks, they all have a lot in common. Here’s what you should know about the different types of stocks.

Common stock

When you think about investing in stocks, common stocks probably come to mind. Common stock gives you an ownership interest in a company and the ability to vote on important matters, such as electing a board of directors or adopting certain company policies.

When people hear the word stocks, they usually think of elaborate charts and fluctuating prices throughout the day. However, when you buy stock, you take ownership of a real company, and your long-term returns will depend on that company’s earnings and overall performance. Earnings growth will help boost the share price for common shareholders and allow the company to share those gains with shareholders in the form of dividends.

Preferred stock

Preferred stocks are more like bonds than stocks. You don’t usually have voting rights, but you do receive dividends before common stockholders. Preferred stock is issued at par, and the shares are redeemed at maturity, so you don’t have the same price appreciation opportunity as common stock. Your return comes primarily from the dividends you receive.

Preferred shares are redeemable before maturity, and some preferred shares are convertible into a specified number of common shares. While preferred stock has a much lower chance of significant returns than common stock, the risk is also significantly reduced.

Large Cap

The range of common stocks is quite large. One way to break this out is to separate companies by market capitalization or the total value of all outstanding shares. While there is no clear definition of large-cap stocks, they are generally stocks with a market capitalization of $10 billion or more. Large-cap stocks are typically mature companies with proven profitability and are sometimes referred to as blue-chip stocks.

Investors looking to invest in large-cap stocks might consider buying an index fund that tracks a large-cap index like the S&P 500. This popular index includes well-known companies such as Apple, Microsoft and Walmart.

Value stock

Value stocks may be considered less exciting cousins ​​of growth stocks, but that doesn’t mean they’re less rewarding for investors. Just as growth stocks can soar to unsustainable prices, so too can other stocks fall to deeply undervalued levels. Definitions of value stocks can vary widely, but if you look at quantitative metrics, they tend to have lower valuation multiples and slower growth rates than growth stocks.

Some of the world’s most successful investors, including Warren Buffett, have made their fortunes buying stocks below their intrinsic value. Be sure to understand the ins and outs of each stock you buy. There’s a reason some stocks that looked cheap ended up being cheap, and their business slumped, dragging down the stock price.

Mid-cap stocks

If you lower the market cap, the midcaps are next, which typically drop $2 billion to $10 billion. These companies are already established, but may still be in the early stages of growth and may have the potential to appreciate substantially. In general, mid-cap stocks can be less risky than small-cap stocks, but riskier than large-cap stocks, although it always depends on the specific company you’re looking at.

Mid-cap stocks can help you diversify your portfolio away from the large-cap stocks that most people tend to focus on. Many of today’s large-cap stocks were mid-cap stocks before reaching new highs.

Small cap

Small-cap stocks can be one of the most valuable sectors of the market because they give you the opportunity to identify a company that is poised for future growth. Small-cap stocks typically have market caps below $2 billion and may still be in the early stages of growth. Due to their small size, small-cap stocks are sometimes overlooked by fund managers, potentially uncovering hidden gems before the rest of the investing world.

However, the potential for high returns comes with greater risk. Small businesses may not be profitable and may have to rely on external financing to stay afloat. They can be particularly vulnerable to a recession when capital dries up and they may not be able to fund their business.

Growth stocks

Growth stocks are one of the most exciting areas in the stock market, but buying them and earning high returns isn’t as easy as the name suggests. Because high-growth companies can generate great returns for investors, their prices sometimes soar to overvalued levels, leaving investors with unsatisfactory returns. However, if you can buy a growth stock at a convincing price, you may be able to capitalize on its success for many years to come.

Companies like Apple, Alphabet and Tesla have all delivered big returns for investors over the past few years, but only time will tell if their growth can be sustained. Growth stocks are often described as the opposite of value stocks, but growth stocks can be undervalued by the market. Growth is only one component of value.

International inventory

International stocks are companies that do most of their business outside the United States. Some of these companies may have stocks traded on U.S. exchanges to take advantage of the country’s resilient capital markets, but their revenue and profits still come from elsewhere.

Most U.S. investors tend to own companies headquartered in their home country, and for good reason. The United States has well-established capital markets and is home to some of the most successful companies in the world. However, adding international stocks to your portfolio can help you diversify and gain exposure to emerging companies around the world.

Bottom line

While there are many different types of stocks, they all represent the interests of actual companies. No company is inherently a growth or value stock and may transition between several different categories over its lifetime. Be sure to analyze the underlying business before buying stock to understand the company’s competitive position and valuation.

You can also buy a basket of different types of stocks using ETFs and mutual funds that track different indices. Funds can hold value or growth stocks of all different market capitalizations. Funds are a great way to gain exposure to specific areas of the stock market without doing extensive research on individual companies.

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