Stocks
Stocks are a type of security that gives stockholders a share of ownership in a company. Companies issue stocks on stock exchanges to raise money, at which point investors buy and sell them based on their potential to go up in value or pay dividends. Stocks are also known as equities or shares of stock. Buying and holding stocks can help you grow your wealth and reach your long-term financial goals, but they also involve risks and volatility. Stock Market Basics
There are two main types of stock
Common and Preferred. Common stock usually entitles the owner to vote at shareholders meetings and to receive any dividends paid out by the corporation. Preferred stockholders generally do not have voting rights, though they have a higher claim on assets and earnings than common stockholders.
There are also other ways to classify stocks based on their characteristics, such as growth stocks, value stocks, income stocks, blue-chip stocks, cyclical stocks and defensive stocks. Each type of stock has different advantages and disadvantages for investors depending on their goals and risk tolerance.
Growth stocks
Growth stocks are companies that are growing their share prices, revenue, profits or cash flow at faster rates than the market at large. Investors choose growth stocks to earn profits from the rapid price appreciation they offer, rather than income from dividends. Growth stocks often look expensive, trading at a high P/E ratio, but such valuations could actually be cheap if the company continues to grow rapidly which will drive the share price up.
Growth stocks tend to be small, emerging, disruptive companies that threaten old and entrenched industry players. Sometimes, they create a brand new product, service or idea, like Uber or Airbnb. Growth stocks thrive during economic expansions when interest rates are low, but they also involve higher risks and volatility than other types of stocks.
Other than growth stocks, there are other types of stocks that you can invest in, such as value stocks, income stocks, blue-chip stocks, cyclical stocks and defensive stocks. Each type of stock has different characteristics and performance depending on the market conditions and the company’s fundamentals.
Value stocks
A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance. A value stock typically has a bargain-price as investors see the company as unfavorable in the marketplace.
Some common characteristics of value stocks include high dividend yield, low P/B ratio, and a low P/E ratio. These metrics suggest that the company is undervalued by the market and has strong fundamentals. Value stocks tend to perform well during economic recoveries when investors are looking for bargains and overlooked opportunities.
Examples of value stocks are J.P. Morgan Chase & Co. (JPM), T-Mobile US, Inc. (TMUS), Warner Bros. Discovery, Inc. (WBD).
Income stocks
Income stocks are equity financial securities that pay regular and predictable dividends. They are purchased with the purpose of generating a steady stream of dividend flows. Income stocks usually offer a high yield that may generate the majority of the security's overall returns.
Income stocks are typically issued by well-established companies that have stable earnings and a low need for reinvestment. They are often found in industries such as utilities, consumer staples, real estate investment trusts (REITs) and telecommunications. Income stocks are suitable for investors who seek regular income and lower risk exposure.
Examples of income stocks are Waste Management Inc. (WM), Verizon Communications Inc. (VZ), Microsoft Corporation (MSFT).
Blue chip
A blue chip stock refers to the shares of an established, profitable, and well-recognized corporation. Blue chips are characterized by a large market capitalization, a listing on a major stock exchange, and a history of reliable growth and dividend payments.
A blue chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. Blue chip companies usually sell high-quality and broadly-used products and services that have a dependable business model and a strong reputation with consumers and shareholders. Blue chip stocks are suitable for investors who seek long-term growth and stability with lower risk exposure.
Examples of blue chip stocks are Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Coca-Cola Co. (KO), McDonald's Corp. (MCD).
Cyclical stocks and Defensive stocks
Cyclical stocks and defensive stocks are two types of stocks that have different characteristics and performance patterns depending on the economic conditions.
Cyclical stocks are companies whose underlying businesses tend to follow the economic cycle of expansion and recession. Some examples of cyclical sectors are finance, energy, industrial and consumer discretionary. Cyclical stocks usually have higher volatility and are expected to produce higher returns during periods of economic strength.
Defensive stocks are companies that provide consistent earnings and dividends regardless of stock market conditions. Some examples of defensive sectors are health care, consumer staples and utilities. Defensive stocks do well when the economy is weak or when it is in a recession.
Investors invest in cyclical and defensive stocks depending on their risk appetite, market outlook and portfolio diversification goals.
How to buy stocks
- Open an account to buy stock. A brokerage account (Webull - Robinhood) is the most convenient place to buy stocks, but it’s far from your only option.
- Research which stocks you’d like to buy. There are thousands of different publicly traded companies offering shares you can purchase.
- Execute trades in your account. Once you’ve decided which stocks you want to buy, you can place an order through your brokerage platform or app.
- Use dollar-cost averaging to buy stock over time. This is a strategy of buying a fixed amount of a stock at regular intervals, regardless of the price fluctuations.
- Think carefully about when to sell your stock. There are many factors that can influence your decision to sell, such as your investment goals, risk tolerance and market conditions.