The Different Types of Stock

Have you ever heard of a blue chip stock? or have you wondered what a Class A stock is or what a preferred stock is? The stock market has a lot of different types of stock that you can buy and sell, some of those include: Common Stock, Preferred Stock, Blue Chip Stocks, Income Stocks, Growth Stocks, Value Stocks, Etc.. You might know a few of these but lets discuss a few so you know whats what.

 

Common Stock

Common stock is the most basic security sold on the market, stock shows ownership in a company/corporation. Stock that you can buy range from Large Mega Cap companies to Small Micro Cap companies.

What i do with stocks i am thinking about buying is, i look at the “Market Cap” first, the market cap shows how much of the total market that particular stock controls.

Shares outstanding – Number (#) of shares that have been sold to public investors. (Like you and i) Shares outstanding will be listed under the company overview.

Market Cap – (Market Capitalization) The total value of a company. Calculated by taking the (Stock price X Shares Outstanding)

 

Preferred Stock

Other than Common stock, you have Preferred stock which is the same thing as common stock EXCEPT Preferred stock owners get paid first with Dividend Payouts ( They receive the money before shareholders of common stock) as well as they are the first to get money in the case of the company going out of business and liquidating. Now while Preferred stock sounds nice since you get money before the regular shareholders but there are some downsides to it all.

Downsides to Preferred stock

When dealing with preferred stock the dividend payment that you would receive every quarter is locked in and set so that you know exactly how much you are getting each and every time. That might sounds very nice and it is except for one thing, sometimes when companies do better than they expected in that particular quarter they, they might have some extra cash from higher profits or whatever it may be. When that time comes the companies will give some of that cash back to the shareholders by giving them extra dividend payment for that quarter, sort of as a bonus. Investors who own Preferred stock and not common stock have a locked in dividend payment so they can not get the bonus, you can potentially lose money if the company were to have a good year or 2. Not getting the bonus because of a locked in dividend also save you if the company had a bad year, since its locked in they have to pay it to you no matter what.

Only under once circumstance will a company not pay a preferred stock shareholder their dividend, that is when they are hurting so bad that they need every penny in order to keep the company running. When something like this happens you get what is called a “Cumulative Preferred Shares” basically just a catch up, if a company does not pay you the dividend due to financial reasons, when they finally are back on their feet and have enough money again they will pay you all the money they missed when they were low on funds.

 

Stock Classes

Stocks can come in different “classes” typically class A and class B. If there is 2 different stock classes available the difference between them is normally the voting rights. So every shareholder of a company has voting rights in what the company is doing, the company will release a statement telling shareholders what they want to do and the shareholders can call them to vote on the subject. Now Class A stock will have more voting rights over Class B, class A may have a 10:1 voting ratio which means the shareholder has 10 votes for every 1 share they own. While on the other hand Class B only has 1:1 voting ratio so only 1 vote for every 1 share that is owned.

 

The Stock Markets different types of stocks will allow you choose a specific trading strategy that you want to take with your portfolio.

 

Types of Stocks

Blue Chip Stocks

Value Stocks

Growth Stocks

Defensive Stocks

Cyclical Stocks

Income Stocks

Penny Stocks

Tech Stocks

 

Blue Chip Stocks

Blue Chip stocks are a select group of maybe a few hundred companies, these are the most well known, established companies on the stock market (McDonalds, Walmart. Etc.) They have been around for a while and are not going any time soon, they offer a slow but consistent growth over the years and more fit for the conservative, laid back investor.

In order to be listed as a blue chip stock the company must meet a variety of requirements:

-a good track record in the market (good history of consistent growth)

-Great reputation

-Steady earnings

-Healthy financials

-Consistent dividends

 

Value Stocks

Value stocks are the stocks that are very under valued, you can get them for a great deal. Many investors go for Growth Stocks for the big upside and potential they have, but when everybody is going to that side, the value stocks over by themselves, nobody notices the great value. You have to look at the fundamentals of the company to determine a good value stock. Some things to look for are good earnings, consistent dividend, and most importantly steady cash flow. A few other indicators to look at are the Price to Earnings ratio (P/E Ratio) the Price to Sales Ratio and the Price to Book Value Ratio.

Value stocks are always a good stock to buy, just remember that a stock may be a good value now, in a month or 2 it may not be so you must keep up with the companies you own stock in and make sure to get out of the trade at the right time.

 

Growth Stocks

Growth stocks are pretty straight forward, they are companies with strong growth potential, the earnings, sales, everything about the company is growing faster than the market as a whole, these are great stocks if you catch them at the right time.

Growth stocks are generally Tech companies or Pharmaceutical companies often developing some new technology or a new medicine.

 

a little downside to Growth Stocks are that most of them pay a very little dividend and some pay even none at all! its for good cause though, the reason they do this is because instead of a larger company who already is established and has a client base built up they can spend extra money to give back to shareholders but to companies that are starting up or even just still growing, they put all the money they can back into the company to further development or for advertisement, something to help the business. Them doing that instead of paying a dividend in return will make you money as well just through the earning and growth of the stock.

There is a group of stocks called the Nifty 50, which are stocks that are set up and expected to have strong growth, all of the Nifty 50 stocks have high P/E Ratios and Steady earnings growth.

 

Income Stocks

Income stocks are pretty straight forward just like the Growth Stocks, income stocks are just stocks that pay a dividend to shareholders. Many investors that have a lot of money invested into income stocks, they often live off of the quarterly dividend paid out by the company. You can make good money just from the returns of dividends, the smart investors with reinvest with it. They will take the quarterly dividend that gets paid to them from the company and they will buy more shares of the companies stock with the money, in return the quarterly dividend will increase every time due to your amount of shares increasing every quarter. Before you know it you will be making so much money just from dividends that you wont have to work anymore! THAT WOULD BE AMAZING!!

The majority of income stocks are big blue chip companies and as well as value stocks.

 

Cyclical Stocks

Cyclical stocks may have a weird name but its just stocks that follow the market, when the market goes up they go up, when the market goes down they go down. These stocks are often referred to as luxuries as nobody needs them. Industries such as the automobile industry, the airline industry, and the hotel industry are Cyclical Stocks. There is good money to be made in cyclical stocks you just have to do your research and know what you are talking about. You have to know the right time to get in and especially you have to know when to exit a trade.

 

Defensive Stocks

Defensive stocks are like your last line of defense when the markets crash, everybody should own some kind of defensive stock. Defensive stocks have consistent growth through everything, if the markets up its going up, if the markets down its going up! Consistent growth over years and years. Defensive stocks come with a price, when everything is doing good and stocks are climbing to new highs, everything is racing upwards. The defensive stocks will still be climbing at their steady pace, you will rarely see defensive stocks making big moves in the market.

Defensive stocks are from companies that provide us with things that we NEED, Food, Shelter, Water. Some popular companies include, Johnson and Johnson (JJ), Proctor and Gamble (PG), and General Mills (GIS). They never have rough times because we ALWAYS need their services.

 

Tech Stocks

Tech stocks are straight forward just like a few we have discussed earlier. tech stocks are companies that sell technology products like computers, computer components, TV’s, Etc.. or it can be a company that develops new technology that we enjoy, some companies are Amazon (AMZN), Apple (AAPL), Facebook (FB). Tech stocks are typically traded at a higher value than what they are worth so be careful, investors like to bet on the future and what he hopes a company will do but not what the company already has or already has accomplished. Tech stocks can be worth the time as many of them have coasted into the hundreds or dollars range, however be careful, tech stocks have limited cash and very little assets. Sometimes a company can just disappear.

 

Penny Stocks

The name “Penny Stocks” may be a little misleading, penny stocks are actually any stock that trades for $5 or less. Penny Stocks are VERY risky, Be careful. They have barely any revenue and no earnings. It as well is also very hard to find news on companies that are Penny Stocks or traded OTC. Since there companies are traded OTC (over the counter) on the OTC Markets, they do not have any regulation, They do NOT have to file with the SEC which makes things very unreliable and very hard to acquire.

There are many good companies that are traded on the OTC Markets, but its a needle in a haystack out there, if you learn enough and manage your risk properly you can find the next large company to come from the OTC Markets. BE VERY CAREFUL!

 

There are many different types of stock, i am sure there’s a kind out there for you!

Don’t be selfish, SHARE this with your friends and spread the wisdom. The stock market is for everybody.

 

 

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