When it comes to investing, stocks are one of the most popular options. But what exactly are stocks? Stocks are securities that represent a share of ownership in a company. They can be bought and sold on the stock market, and they can be used to generate capital growth or dividends. There are four main types of stock: common stock, preferred stock, growing stocks, and value stocks.
In this article, we'll take a closer look at each type of stock and how they can be used to generate returns. Common stock is the most basic type of stock. 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 stocks also offer the potential for price appreciation if the company performs well.
Some common stocks also pay regular dividends, but payments are never guaranteed. The disadvantage of common stock is that its 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 shares pay their holders guaranteed dividends, in addition to the possibility of price appreciation, as is the case with common shares. If a company's common stock pays dividends, it's quite possible that the preferred stock dividend will be higher.
Preferred stock shareholders are also more likely to receive some form of compensation if the company becomes insolvent. However, the biggest disadvantage of preferred shares is that preferred shareholders do not have the right to vote. Some companies choose to issue multiple classes of shares. These stock classes are indicated by letters, such as class A shares and class B shares. The most common reason a company issues different classes of shares is to give key investors greater control over the company's affairs. 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 they tend to have more attractive valuations than the general market. Securities investors try to discover companies in the value-added stock category, buy their shares and wait for the rest of the market to realize their true value. 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.
Income stocks adapt to risk-averse investors seeking regular income by paying dividends. When it comes to investing in stocks, it's important to understand the different types available and how they can be used to generate returns. Common stocks offer potential for price appreciation and dividends but no voting rights; preferred stocks offer guaranteed dividends but no voting rights; growing stocks offer potential for price appreciation but no dividends; and value stocks offer attractive valuations but no guarantees.