Stocks are simply a representation of the shares of ownership in a corporation. When you buy stocks, you essentially buy partial ownership of a company. Although, your percentage ownership is most likely going to be very small. For example, Facebook has 2.4 billion outstanding shares, so 100 shares of this company is a very small portion of the company as a whole. Yet, you will still enjoy profits from these shares. Continue reading to learn more about the different types of stocks and more.
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Table of Contents
Where Are Stocks Traded and How Are Stock Prices Determined?
Stocks trade on an exchange. The two most well-known stock exchanges in the U.S. are the New York Stock Exchange and Nasdaq.
A quick summary of the New York Stock Exchange, is that it is the original stock exchange in the U.S., founded in 1792 on Wall Street in downtown Manhattan. The NYSE is now the home to over 2,000 listed stocks.
Nasdaq was the world’s first electronic trading market, born in 1971. The exchange grew in popularity by hosting big tech companies like Microsoft, but now this global exchange hosts over 4,000 individual stock listings.
What Are the Types of Stocks?
Stocks can be broadly classified into different categories based on their size, growth profile and other characteristics. When you hear investors or analysts talk about stocks, you might hear some of the following terms being used.
Common stock is named this because it is what most investors think of when think of buying stocks. This is the stock that represents the partial ownership in the company and whose prices are shown on the stock market. Prices will vary, depending on the market and investor demands.
Preferred stock is a channel for income that is more like a bond than a common stock. This is because it pays dividend to the people who purchase these kinds of stocks before any dividends to common shareholders. Preferred stock prices aren’t usually as volatile as common stock prices.
A growth stock is issued by a company with a high growth rate, oftentimes a young company in an expanding industry like biotechnology. This type of stock can have volatile share prices.
A value stock is a stock that sells at what seems like a low price relative to its earnings or future prospects. Stocks in older, more established companies often fall into the value category, as their long-term steadiness doesn’t attract the hot-button, growth-stock crowd.
Dividend stocks are stocks that pay back their holders regularly and consistently. Often, they pay back higher than average common stock. They are often designated as value stocks as well, and they tend to come from larger, established companies.
A solid, consistent performer, defensive stocks continue to pay dividends even during a downturn in the economic cycle. They are normally found in industries that consumers need even when times are hard, such as food and beverages.
A cyclical stock is the opposite of a defensive stock. Cyclical stocks are economically sensitive, meaning they earn a lot of money when times are good but can get crushed when the economy turns south. Industries that are more discretionary in nature, such as car manufacturers, hotels and airlines, are usually considered cyclical.
Factors To Consider When Evaluating a Stock
There are many ways to evaluate a stock to determine whether it is right for you. Here are some of the more common metrics to use.
Market capitalization is simply the total value of all of a company’s outstanding shares of stock. Market cap is often used as a representation of the size of a company and can be used to classify companies into large-cap, mid-cap and small-cap categories.
Price-Earning ratio is simply a company’s current price divided by its earnings. P/E is often used as an indicator of whether a stock is cheap or expensive, given historical and industry norms.
These metrics can be important to income investors. If a stock has paid consistently rising dividends for decades, then can be a more reliable source of income than one that pays randomly.
Earnings Reports and Projections
Earnings reports and earnings projections are some of the primary drivers of stock prices. As earnings grow, stock prices tend to follow. When a company reports earnings that are ahead of earnings projections, the stock price may shoot up dramatically.
There are some key things to take away that will help you invest in stocks that will make you money. When investing, make sure you are expecting to do so in for the long run. Make you sure you know what you’re buying and when to sell it. Understand your risk tolerance too, which means how much money you are willing to lose if your investment goes wrong. Finally, diversify your portfolio so that if that investment sinks, then you don’t lose all your money. For more posts like this, check out our list of stock brokers and bank guides!