Investing in stocks can be a great way to build wealth, but it's important to understand the different types of stocks available. This guide will provide an overview of the seven main types of stocks, including common stocks, preferred shares, large cap stocks, mid-cap stocks, small cap stocks, domestic stocks, international stocks, and growing stocks. Common stock is the most basic type of stock and is what most people are referring to when they talk about stocks. When you own common stock, you have the right to vote on board members and other corporate matters at a company's annual meeting.
Generally, one share equals one vote. Common stock also offers the potential for price appreciation and dividends, although payments are never guaranteed. The downside is that common shareholders are the last in line to be reimbursed if the company goes bankrupt. Preferred shares offer some of the advantages of both common stocks and bonds in a single security.
Preferred shareholders receive guaranteed dividends and are more likely to receive some form of compensation if the company becomes insolvent. However, preferred shareholders do not have the right to vote. Some companies choose to issue multiple classes of shares, such as class A shares and class B shares. This is usually done to give key investors greater control over the company's affairs.
Alphabet Inc., for example, has three classes of stock: GOOGL (class A common stock with one vote per share), GOOG (class C common stock without voting rights), and class B shares held by the original founders and Google's first investors with 10 votes per share. Large cap stocks are well-established companies with a large market capitalization. They have a long successful track record of generating reliable profits and being leaders within their industry or sector. The downside is that these companies grow much more slowly than newer and smaller companies, so investors shouldn't expect excessive returns when investing in large cap stocks.
Mid-cap stocks may offer the potential for growth as they expand their share in the markets in which they operate. They are also often the target of mergers or acquisitions by large capitalization companies. Small-cap stocks offer investors tremendous growth opportunities but are among the riskiest investment options due to their greater market volatility. Growing stocks are companies that are expanding their revenues, profits, stock prices, or cash flows at a faster rate than the overall market. The goal when investing in growing stocks is to see strong price appreciation over time.
Growing companies tend to reinvest their profits in the business and may not pay dividends. Value stocks trade at a discount from what a company's performance might otherwise indicate and tend to have more attractive valuations than the general market. Securities investors try to discover companies in this category and buy their shares in hopes that the rest of the market will eventually realize their true value. Front-line stocks are well-established companies that have a large market capitalization and generate reliable profits. Conservative investors could highlight their portfolio with front-line stocks, especially during periods of uncertainty. Income stocks generate most of their returns as dividends and can be attractive for risk-averse investors seeking regular income. These companies have a high dividend payment rate because there are few opportunities to invest money in the business that would generate a higher return on shareholder capital.
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