Stocks (or equities, depending on how they’re categorized) are an important part of many investors’ plans to build wealth. They represent partial ownership of a company, and often come with voting rights. There are a variety of different types of stocks, though, so it’s essential to understand the different benefits and risks of each.
Common Stock
The most common type of stock is common stock, which allows shareholders to get a proportional share of the assets and profits a company earns. However, this type of stock comes with an inherent risk: If the company fails, shareholders could lose all their investment.
Preferred Stock
Preferred stock carries no voting rights, but usually guarantees shareholders a fixed dividend payment in perpetuity. They also tend to have lower prices than common stock.
Dividends
Companies that pay dividends to their shareholders typically do so because they’ve made a profit during the year and want to distribute it to their investors. These payments are normally a percentage of current year net earnings. But special dividends — funded with retained earnings or asset sales — are sometimes made, too.
Market Capitalization
A company’s market capitalization is the value of all of its shares at any given time. It can be influenced by several factors, including analyst business forecasts and outlooks for the company’s general market segment.
Price Changes
The price of a stock fluctuates in response to market demand and supply. Similarly to other commodities, the price of a stock is determined by the market’s willingness to buy and sell it at any given moment. During times of extreme market volatility, it can be difficult to predict when a stock’s price will rise or fall.
Investors choose the best stocks based on their goals and risk tolerance. They may prefer to trade growth for security, or they may seek a combination of both.
Value Stocks
Value stocks are mature, well-known companies that have built reputations and established a strong business model over time. These stocks are considered to be less risky than growth stocks, but they still have the potential to grow over time.
Large-Cap Stocks
A company with a large market cap is considered to be a major player in its industry. They have a high level of public interest and are easily accessible to everyday investors through major exchanges.
Mid-Cap Stocks
A mid-cap company is smaller than a large one, but it has the resources to compete with larger firms. They’re also generally more profitable and have higher revenue growth rates.
Small-Cap Stocks
A small-cap stock is a relatively new company that has a low market cap, but it has the resources to compete with more established firms. They’re usually a good choice for beginners, because they’re easier to navigate and offer more financial flexibility.
If you’re new to investing, it’s a good idea to diversify your portfolio with other types of investments, too. This will help protect your money from losses and allow it to grow more steadily over the long term.