Stock Trading Basic

Stock Trading Basic: Different Types of Stocks

To successfully trade, you need to understand the different types available in the market. Stocks can basically be classified into common stock and preferred stock.

Common Stock

Common stock also referred to equity, shares, or, securities represent the ownership of the holder in a company. The stockholder has a right to the company’s profits, which are distributed in the form of dividends. The investors also have voting rights, one vote per share, to elect the board members of the company. Given the level of risk involved with common stock, it yields higher rewards than any other form of investment securities. On the flip side, if the company is liquidated, or, goes bankrupt, the common stock holders will receive their money only after the bondholders and the preferred stockholders have been paid.

Preferred Stock

Preferred stock, like common stock, does represent some degree of ownership in a company but this type of stock is different in the sense that it usually does not come with the voting rights, though this fact may vary from company to company. The advantage of preferred stock lies in the fact that in the event of liquidation of the company, the preferred holders are paid their dues after the creditors but before the common stock holders. Also, the company has the right to purchase these shares from the owner, though at a premium, at any time for any reason. Preferred stock cannot be traded in the stock market and so the earning for these is only in the form of dividends issued by the company.

Study the market and you will find there is a bewildering kind of common shares available for trading. Depending on the time period for investment and the level of risk involved you can choose from the following types of common shares:

Blue Chips

Shares of companies whose assets, sales turnover and profits continue to grow steadily are known as blue chips. These companies have got their names from the game of poker where the blue chips have the highest value. These financially sound companies offer high quality services and are known to weather storms to deliver profits. These companies attain growth by following a policy of aggressive expansion of profitable manufacturing facilities and widening the market network. They also enjoy benefits of tax incentives for growth through expansion, mergers and acquisitions.

Growth Stocks

These refer to shares of comparatively newer players in the market who are performing outstandingly well. These will eventually mature into blue chip stocks and gradually become leaders in their product-market segments.

Cyclical Stocks

As the name suggests, these are shares of companies, which are susceptible to fluctuations, caused by economic and trade cycles. They do exceptionally well during the boom period but hit rock bottom during the bust time. Accordingly, the share prices also go up and down in a cyclic manner. Examples include automobiles, housing and travel and leisure.

Turnaround Stocks

Turnaround stock is one whose market price is lower than its intrinsic value because the company has recently gone through a bad patch. The fortunes of these companies may change or they may be taken over by more successful companies. In such a scenario, shrewd investors pick up the company’s shares at relatively lower prices and reap a fortune when the prices go up.