When it comes to investing in the stock market, it is important to understand the different types of stocks available and their unique characteristics. There are four main types of stocks: IPO shares, common stocks, preferred stocks, and value stocks. Each type of stock has its own advantages and disadvantages, and investors should be aware of these before investing. In addition to buying different types of stocks directly, investors can gain profitable exposure to thematic stock types through ETFs. IPO shares are shares of companies that have recently been made public through an Initial Public Offering (IPO).
IPOs tend to generate a lot of enthusiasm among investors looking to enter the ground floor of a promising business concept. However, they can also be volatile, especially when there is disagreement within the investment community about their growth and profit prospects. Generally, a stock retains its IPO share status for at least one year and between two and four years after its IPO. Many companies offer common and preferred shares. For example, Alphabet Inc., Google's parent company includes Alphabet Inc.
(GOOGL), its Class A common stock and Alphabet Inc. (GOOG), its Class C preferred stock. Common stocks represent ownership in a company and give shareholders one vote per share to elect board members who oversee major decisions made by management. In the long term, common stocks, through the growth of capital, produce higher returns than almost any other investment.
This higher return comes at a cost, since common stock carries the greatest risk. Preferred shares represent some degree of ownership in a company but generally do not have the same voting rights as common stocks. Preferred shares have fixed dividends that are guaranteed by the company. This is different from common stocks, which have variable dividends that are never guaranteed. Another advantage is that, in the event of liquidation, preferred shareholders are liquidated before the common shareholder (but even after debt holders).
Preferred shares may also be redeemable, meaning that the company has the option to buy the shares from shareholders at any time and for any reason (usually in exchange for a premium).Value stocks trade at a discount from what a company's performance might otherwise indicate and they tend to have more attractive valuations than the general market. Securities such as financial, health and energy names tend to perform better during periods of economic recovery as they generally generate reliable revenue streams. Investors can track the value of stocks by adding the SPDR Portfolio S&P 500 Value (SPYV) ETF to their watchlist. Growing stocks have outperformed equity stocks by approximately 5.93% over the past 10 years. Front-line stocks are well-established companies that have a large market capitalization.
They have a long successful track record of generating reliable profits and being leaders within their industry or sector. Conservative investors could highlight their portfolio with front-line stocks, especially during periods of uncertainty. Several examples of front-line stocks include computer giant Microsoft Corporation (MSFT), fast-food leader McDonald's Corporation (MCD) and energy leader Exxon Mobil Corporation (XOM). Income stocks adapt to risk-averse investors seeking regular income by paying dividends. These stocks are not known to normally pay dividends. Within these broad categories of common and preferred shares, the different types of shares are further divided in other ways.
It is important for investors to know the different types of stocks available, understand their unique characteristics, and be able to determine when they may represent an appropriate investment. Although there are no safe bets in the stock market, they can be less risky than other types of stocks. Today we provided an overview of four main types of stocks: IPO shares, common stocks, preferred stocks, and value stocks. Each type has its own advantages and disadvantages and investors should be aware of these before investing. In addition to buying different types of stocks directly, investors can gain profitable exposure to thematic stock types through ETFs.