This article discusses the types of stocks you should know as an investor.
What are Stocks?
A stock (also referred to as equity) is a type of investment that indicates ownership of some parts of an issuing company.
They are the centrepiece of many individual investors’ portfolios, and they are mostly bought and sold on stock exchanges.
Shares are units of stock that entitle their owners to a percentage of the company’s assets and income based on how many they possess.
This article does not cover investing in stocks. You can read more here on how to invest in stocks.
Types of Stocks
1. Common Stocks
Common stock, also known as ordinary shares, is a type of stock that shows a company’s partial ownership. This type of stock entitles holders to generate earnings, which are typically distributed as dividends. A company’s board of directors is chosen by the common stockholders, who also elect corporate policy. In the case of liquidation, holders of this class of stock are entitled to the company’s assets, but only after preferred stockholders and other debt holders have been paid.
2. Preferred Stocks
The holder of preferred stock, also known as preference shares, is entitled to periodic dividend payments before distributing dividends to common shareholders. Preferred shareholders are paid back first before the common stockholders if a company dissolves or declares bankruptcy. Preferred stock is appropriate for investors seeking steady passive income but they have no voting rights.
3. Growth Stocks
Typically, growth investors look for companies whose sales and profitability are rising quickly. Growth stocks typically involve increased risk and tough competition, but the potential profits can be quite large. Successful growth stocks are companies with strong and increasing customer demand, especially when there are long-term societal changes that promote the use of their products and services.
4. Value Stocks
Shares of value stocks are affordable, whether compared to their peers or their historical stock price. They are thought of as traditional, well-known businesses that have already become market leaders and need more room to grow further. They are attractive options for people looking for greater price stability while still enjoying some of the benefits of stock exposure.
5. Defensive Stocks
These stocks are favoured during difficult market conditions since they are mostly unaffected by economic circumstances. They often perform consistently or even better during a market meltdown or recession. Defensive equities are frequently considered to be a “safe haven asset.” Food and beverage, health care, and communication services are typical examples.
Learn more about assets that do well in a recession.
6. Income Stocks
Stocks that pay out higher-than-average dividends from a company’s profits or excess cash are known as dividend stocks. They are suitable for investors looking for regular income. Dividend stocks are also known as income stocks. They typically have lower volatility and less capital appreciation than growth equities.
7. IPO Stock
Stocks from companies that have recently launched an initial public offering are known as IPOs. Investors who invest early in solid business ideas are typically excited when a new firm goes public. They can be risky, though, particularly if the investment community has differing opinions about their prospects for growth and profit. Once a stock goes public, it usually remains an IPO stock for at least a year and as long as two to four years.
8. Hybrid Stocks
Some businesses offer preferred shares with the possibility of changing them into common shares under specified restrictions at a given period. They are also referred to as convertible preferred shares or hybrid stocks and may or may not have voting rights.
9. Large Cap, Mid-Cap, and Small Cap Stocks
Stocks are valued according to the market capitalization of all of their outstanding shares. Large-cap stocks are those of companies with the highest market capitalizations. Smaller enterprises are successively represented by mid-cap and small-cap stocks. A widely accepted rule specifies that equities are classified as large-cap if their market capitalization is $10 billion or more, mid-cap if it is between $2 billion and $10 billion, and small-cap if it is under $2 billion. Small- and mid-cap stocks have greater growth potential in the future. Still, they are riskier than large-cap equities which are considered safer and more conservative investments.
10. Dividends and Non-Dividends
Many equities periodically pay dividends to their owners. Dividend stocks are highly prized in many investment categories since they provide investors with sizable income. However, stocks are exempt from dividend obligations. As a result, if their values rise over time, companies that don’t pay dividends could still be wise investments. Though there has been a trend in recent years of more stocks paying dividends to their owners, some of the largest corporations still do not pay dividends. Examples of large companies that don’t pay dividends include Amazon, Meta, Alphabet, Tesla, etc.
11. Cyclical Stocks
Investors refer to specific companies as cyclical stocks because they are more vulnerable to general business cycles. For example, shares in businesses engaged in manufacturing, travel, and luxury products are examples of cyclical equities because a downturn in the economy might impair consumers’ capacity to make large purchases swiftly. But when economies are robust, a surge in demand can hasten these businesses’ recovery. As a result, cyclical stocks often do well during prolonged bull markets.
12. Non-Cyclical Stocks
When economic growth slows, non-cyclical stocks consistently outperform the market. Given that they are constantly in demand as necessities, they may also be referred to as consumer staples. Grocery store companies are an example of non-cyclical equities since people still need to eat whether the economy is doing well or poorly. While cyclical stocks frequently thrive during robust bull markets, non-cyclical stocks typically do better during bear markets.
13. Safe Stocks
Safe stocks are those with share prices that fluctuate less than the entire stock market. They are sometimes referred to as low-volatility equities and typically operate in sectors of the economy that are less subject to shifting economic conditions. Additionally, they frequently provide dividends, and this income can mitigate declining share values in challenging economic times.
14. Blue Chip Stocks
Blue chip stocks are corporations with lower liabilities, reliable earnings, and a history of dividend payments. Investors looking for safer investment options may choose these huge, well-known corporations with a strong financial performance track record. Coca-Cola Company, Guinness Nigeria and IBM Corporation are a few examples of blue-chip stocks.
Hopefully, this article has enlightened you as an investor on some of the types of stocks available out there.
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