If you’re going to try your hand at investing in the stock market, it’s important to know a little bit about what you’re getting into. There’s no end to strategies, guides, and ideas on how to approach investing, but understanding the fundamentals is the best way to move forward with success.
One piece of that puzzle is understanding the different categories of stocks. Businesses in nearly all industries are available on the stock market, giving you a wide variety of options to choose from.
That said, things get more complex as you have more options. Our hope is to give you a broad view of what your opportunities are as you start to plan your investment strategy.
Categories of Stocks: A Guide to Essential Types
Because stocks come in all different forms, some individual ones might fall into a couple of these categories. Stocks are complex, and they have the habit of changing over time.
While some stocks are categorized by things like company size, industry, geographic location, and style, we’re going to look at classifications that are particular to the stock itself, not details of the company.
Hopefully, some of the stock categories listed below can give you some ideas as to where you’d like to start investing.
Let’s get started:
- Speculative Stocks
Speculative stocks are the ones you hear about that make people rich overnight. They’re incredibly cheap stocks that have very little background information or data to run with.
In most cases, investors in speculative stocks use their gut as their guide. Sure, you could look at a company’s industry, staff, and initial prospects, but those factors can’t give you a specific answer as to whether the company will thrive.
You invest in speculative stocks with the idea that your money could multiply exponentially. That said, just like going to a casino, there’s a good chance that you’ll lose on your bet.
- Blue Chip Stocks
Growth stocks are those that you can be pretty confident about. A review of the stock’s history shows that it’s had consistent growth over time and it isn’t susceptible to small-time dips in the economy.
Sure, growth stocks can lose value occasionally, but they’re slow and steady enough to rise through those troubles eventually. These are the stocks that you put money into for the long haul.
The power of compound interest can do wonders with a small investment in a growth stock over a number of decades.
- Penny Stocks
Penny stocks are similar to speculative stocks, although they might be a little cheaper.
They tend not to cost more than $5 a share, and they’re about as volatile as anything you’ll find on the market. In other words, they’re risky.
That said, there’s an art to playing the penny stocks. You could make a quick fortune if you do things right. Take a look at penny stock courses to find out more about how you could potentially start investing them.
- Value Stocks
Value stocks are considered to be great bargains. A lot of times, a company’s true worth doesn’t shine through in its stock prices.
If the industry is failing or the economy has shifted in a way that prevents this business from succeeding, its stock price will fall. That said, the company still has great infrastructure and a number of assets that will almost certainly make it valuable in the future.
In this case, it’s wise to invest while prices are low and ride the value back up as things even out. A good example of this is the price of stocks during the COVID-19 pandemic.
Stock prices plummeted, but the value of good companies is certain to bounce back up. Investing in those low prices would bring high returns when the market returns to normal.
- Common Stock
Common stocks are the ones that most people get. You get a say in the dividends if the company is dissolved, you claim partial ownership of the company, and you get voting rights in a few instances.
Investing in common stock gives you no real limit to the amount of money that you could earn. As the value of the company increases, so does your wealth. On the other end, you’re liable to lose all of your money if that company tanks out of the blue.
If the company dissolves without holding onto any of their valuable assets, you would be left with nothing to show for your ownership of that company. You can sell your shares at any time unless you’re engaged in some other contractual agreement.
- Preferred Stocks
Preferred stocks are similar to common stocks but they provide a few unique benefits.
First, you’re entitled to a certain portion of your investment if the company liquidates while you still have ownership. In other words, there’s a little safeguard against you losing all of your money.
That said, you could still lose a great deal of your money if the value drops. Additionally, as a preferred shareholder, you’ll receive your dividends before the other investors who have chosen to buy common stock.
These perks of owning preferred stocks won’t give you too much more money than common stocks will if the company is successful. That said, you can significantly lower your risk in the investment through the purchase of preferred stocks.
On the other hand, preferred stockholders don’t get to have any say in company votes or corporate decision making. The types of preferred stock on the market are varied according to the company.
Some companies could have different tiers of preferred stock that they use for different reasons. You could also buy a convertible preferred stock, which is a preferred stock that you can easily change into common stock if you choose to.
Need More Financial Guidance?
As you think about the categories of stocks that you’d like to invest in, you’ll notice that there are a lot of small details to understand and pay attention to. We’re here to help.
Explore our site for more key financial advice as you begin your trek into the world of stocks.