What is a stock?
Stocks are the most common type of security.
There are two types of stock: common and preferred. The majority of all stock sold is issued in common stock. Common stockholders are shareholders who can vote on stock splits, company mergers, and director elections, but they don’t get to vote on the payment of cash or stock dividends.
Preferred stocks are similar to bonds in structure, but they trade on the stock exchange like common stocks. Preferred stock is called this because it has a preference over common stock with respect to dividends and if the company has to liquidate its assets due to bankruptcy. Preferred stockholders don’t get a vote.
How do stocks work?
Capital gains
If you sell your shares for more than you paid for them, you keep the difference, which is referred to as a capital gain. Conversely, if you sell your shares for less than what you paid for them, this is called a capital loss.
Dividends
Dividends are a little piece of the company’s profits, typically paid quarterly- in some cases monthly.
Stocks typically fall into three investment categories.
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Growth and income
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Large-cap companies, as well as REITs and utilities.
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Growth
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Small- and mid-cap companies
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Aggressive
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Micro-cap companies, companies with share prices below $4, research-restricted stocks, and emerging-market stocks.
Common investing strategies
All investing strategies have one goal in common: maximizing returns while minimizing risk. While there are lots of ways to do this, here are some of the most common investment strategies for stocks:
Strategy 1 – Value investing
This is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic value. If you know the true value of something, you can save a lot of money when you buy it on sale. Value investing requires investors to remain in it for the long term.
Strategy 2 – Growth investing
Growth investors look for investments that offer strong upside potential when it comes to the future earnings of stocks. They typically invest in growth stocks – young or small companies poised to expand – expecting to profit from a rise in their stock prices. However, such companies are untried, and often high risk.
Strategy 3 – Income investing
Here the focus is on dividend-paying stocks that can be counted on as a source of income. These portfolios generally contain blue-chip stocks with conservative balance sheets and a history of increasing dividends per share. You get a generally reliable, additional source of income.
Strategy 4 – Momentum investing
Momentum investors ride the waves, capitalizing on the continuance of an existing market trend.