Stocks
A stock is a general term used to describe the ownership certificates of any company. A share, on the other hand, refers to the stock certificate of a particular company. Holding a company’s share makes you a shareholder.
Understanding stocks
Stocks are of two types—common and preferred. The difference is while the holder of the former has voting rights that can be exercised in corporate decisions, the later doesn’t. However, preferred shareholders are legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.
Common-
Stock entitles owners to vote at shareholder meetings and receive dividends.
Preferred-
stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.
Most investors own common stock in a public company. Common stock may pay
dividends, but dividends are not guaranteed and the amount of the dividend
is not fixed.
Preferred stocks typically pay fixed dividends, so owners can count on a set amount of income from the stock each year. Owners of preferred stock also stand at the front of the
line when it comes to the company’s earnings: Excess cash distributed by dividend is paid to preferred shareholders first, and if the company goes bankrupt, preferred-stock owners receive any liquidation of assets ahead of common-stock owners.
Common and preferred stocks categories
Growth stocks-
have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
Income stocks-
Pay dividends consistently. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
Value stocks-
have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favour with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
Blue-chip stocks-
are shares in large, well-known companies with a solid history of growth. They generally pay dividends.
Another way to categorize stocks is by the size of the company, as shown in its market capitalization. There are large-cap, mid-cap, and small-cap stocks. Shares in very small companies are sometimes called “microcap” stocks. The very lowest priced stocks are known as “penny stocks.” These companies may have little or no earnings. Penny stocks do not pay dividends and are highly speculative.
Key Things to Know About Stocks
Investors who long term buys and holds shares of company-
that means they own a diversified portfolio of many stocks and hold on to them through good times and bad.
Investing in individual stocks takes time-
we should research each stock you purchase, which includes a deep dive into the bones of the company and its financials. Many investors opt to save time by investing in stocks through equity mutual funds, index funds and ETFs instead.
These allow you to purchase many stocks in a single transaction, offering instant diversification and reducing the amount of legwork it takes to invest.
