For beginners, one of the most difficult aspects of understanding stock investments deals with the various types of stock. There are several different types of stock to choose from. Income stocks are issued by companies that are stable. The company will not usually reinvest a large amount of their profits back into the company each year.
The profits are instead distributed to the shareholders in the form of a dividend. If you want dividend income and capital appreciation, you should look towards income stocks. But remember that dividends will be taxed. Plus, the dividend could go higher or lower each year.
Growth stocks are issued by companies that are looking to grow and expand. There is usually no, or very little, dividend income from growth stock. Many of the companies are just starting out in the business world and are actively reinvesting their earnings into their companies. Most advisors consider growth stocks a good choice for those looking to make a nice return over a long period fo time.
Annual returns usually run around 11% over ten years. The idea is that growth stocks will grow given time. A value stock is a stock that has gone down in price. It is usually considered to be a good buy. Value stocks are based more on the company's assets than the earning potential. The growth of the company isn't the issue at hand with a value stock.
Investors buy value stocks for shares of a solid company at a good price and that in time the price will reflect the stability of the company. Then the price of the stock will go up. Speculative stocks are like the new stocks on the block. They are the riskiest stock available.
You can either make a lot of money or lose it all quite easily. You have to gauge your own risk level. These are usually brand new companies or unknown companies. This category would include all those dot-coms. Preferred stock happens when a company issues different classes of stock. The company could have a common stock and then have a preferred stock.
The preferred stock has a higher claim to company earnings, such as dividend payments. The amount of the dividend payment is fixed, unlike the common stock, and will be paid before common stocks are. If you own a preferred stock in a company that isn't doing well, you will still get your fixed payment.
You will also share in the assets in the case of a bankruptcy before those holding common stock will. These are the most commonly thrown around stock types. You have probably heard of them around the water cooler at work or on the news.
There are several other types of stocks that are also available, including convertible preferred stocks and blue-chip stocks. It is essential that you understand the different types of stocks when looking to invest. They all have different benefits and drawbacks. What type of stock you invest in depends on what you want to see from your investment. Are you looking for a quick way to make a lot of money? Or are you wanting to invest money and simply let it grow over time? Ask yourself these questions when looking at what type of stock works for your financial goals.
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