Investing in the stock market can seem daunting to the uninitiated due to the vast choice laid out in front of a person. Stock exchanges and brokers add fuel to the fire by warning would-be investors about potential risks, including the value of their investments being able to fall, not only increase. However, the stock market seems less dangerous once you arm yourself with knowledge, such as the different types of stocks and companies available for investing. This article serves as a guide for readers considering delving into stocks and shares in 2024.
You should never purchase a stock unless you have exhaustive knowledge of how the company makes money. Do they manufacture a product? What is their flagship product, and how well does it sell? Are they considered a market leader? You probably would not go on a date with someone without knowing anything about them; you could be asking for trouble if you did. Knowing more about a company gives you an insight into the type of stock or shares it issues. Some are known for growth, others pay regular dividends, while others only boom when the economy is strong. Keep reading to learn more.
Cyclical stocks are closely tied to economic cycles. They perform well when the economy is booming but less so during times of austerity. The automotive industry is a shining example, thriving during periods of economic growth but suffering during downturns. Other examples include luxury goods and gaming companies like the everygame sportsbook review, two industries that are reliant on consumers having disposable income.
Common stocks represent ownership in a company; they entitle shareholders to a portion of its profits and voting rights. These stocks are best known for their potential for capital appreciation, making them popular in investors’ portfolios. Receiving dividends, although they are not guaranteed, is one of the primary advantages of common stocks. Common stocks can be volatile as market dynamics, company performance, and broader economic trends influence them.
Preferred stocks come with a fixed dividend payout, which offers investors a steady income stream. However, that security comes at a price because the potential for price appreciation is limited compared to common stocks. The Coca-Cola Company is the perfect example of a preferred stock. It is known for its stable business model and consistent dividend payments, although its share price does not usually soar and plummet, nor is there much scope for it to do so.
Blue-chip stocks off investors confidence and stability because they belong to well-established, financially sound companies. Their size and maturity may limit their growth potential compared to smaller, riskier companies, but they often weather market fluctuations better than other types. Microsoft Corporation exemplifies a blue-chip stock, a company known for innovation and its solid financial standing.
Growth stocks are those that belong to companies that are expected to grow at an above-average rate compared to others in the market. Take Amazon.com Inc., a company renowned for continuously expanding its market presence and disrupting various industries along the way. Growth stocks have the potential to increase exponentially in value but come with the risk of having potential volatility and valuation concerns, especially if the company grows rapidly.
Value stocks are perceived to be undervalued by the market, which means there is a ton of potential for appreciation if the market corrects its valuation at any stage. Investors choose these stocks for that potential increase, but the stock could remain undervalued for extended periods or even have underlying issues affecting their value. Ford Motor Company could be considered a value stock. Ford stock trades at a forward price-to-earnings ratio of 5.6x. Compare that to the 75x of Tesla, and you can see why Ford may be seen as being undervalued.
Income stocks are hugely popular with investors thanks to their higher-than-average dividends. On the flip side, income stocks’ share price can be volatile due to limited growth potential. For example, AT&T is known for its relatively high dividend yield (currently around 6.4%), but its price fluctuates wildly. Its shares traded at $29.48 on January 3, 2020, but $17.47 four years later.
Defensive stocks represent companies offering essential products or services that remain in demand even during economic downturns. Procter & Gamble Company is renowned for its consumer goods and for maintaining sales despite economic fluctuations, which is excellent when markets are turbulent, but it can exhibit slower growth when the economy is booming.
Small-Cap, Mid-Cap, and Large-Cap Stocks
The word “cap” in small-cap, mid-cap, and large-cap stands for capitalization, which shows the total market value of a company. Small-cap shares have the potential for high growth but come with increased volatility. Mid-cap stocks provide a balance between stability and growth potential, while large-cap stocks tend to have slower growth potential but come with lower volatility. A relatively new company like Etsy Inc. would be considered a small-cap stock, while Alphabet Inc., Google’s parent company, would be a large-cap.
Penny stocks are low-priced, hence their name. They can be highly volatile and are suspectable to manipulation due to their low liquidity and lack of information. Many investors seek out penny stocks hoping to turn a relatively small investment into a bumper payday. However, such success stories are a rarity. Back in 1993, British clothing giant NEXT plc was in its infancy, and shares traded at £1.45 per share. Those shares exchange hands at £84.86 today, an increase of over 3,200%. However, for every NEXT plc, there are thousands of companies that went to the wall, so exercise extreme caution with penny stocks.
Understanding the diverse types of stocks available is crucial for informed decision-making when investing in the stock market. Each category offers unique characteristics and associated risks; the type you buy is down to personal preference and your tolerance for risk.
Some investors prefer the stability of blue-chip stocks, while others seek up-and-coming small-caps with their unrivaled growth potential. The choice is yours. Regardless of the type of stock you ultimately purchase and the companies you invest in, always remember the golden rule of investing: perform your own exhaustive research.