Table of Contents
Chapter 1: Introduction to Trading Stocks
Chapter 2: Different Categories of Stocks
Chapter 3: Functioning of The Stock Market
Chapter 4: Stock Market and Price Movements
Chapter 5: How to Buy Stocks
Chapter 6: Choosing Your Investment Strategy
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Chapter 2: Different Categories of Stocks
– Classification Based on Size of Company and Investment Risk
– Blue Chip Stocks
– Penny Stocks
– Classification Based on Rights of Shareholders
– Preferred Stocks
– Common Stocks
– Classification Based on Nature of Returns
– Income stocks
– Value stocks
Chapter 2: Different Categories of Stocks
There are several ways in which stocks can be categorized. Understanding these categories will help you construct a more balanced portfolio that yields consistent results. Most of the stocks lie between these two extremes and offer a moderate risk return ratio to investors.
Classification Based on Size of Company and Investment Risk
Stocks are often also classified on the basis of the size of the company and its standing in the market, which is usually directly related to the risk involved in the investment.
Blue Chip Stocks
In casinos, blue chips typically have the highest value. This practice has carried over into the financial world in the usage of the term ‘blue chip’ to denote a large and successful company. These blue chip companies are established players in the market, usually with a diversified range of products and services, and have proven their stability even in adverse economic conditions. Blue chip stocks are considered an essential part of any long term portfolio as they are considered more reliable.
Penny Stocks
As the name suggests, penny stocks come cheap and are often favored by small speculators. The risk is high because they originate from small companies which are yet to establish themselves in the market. There have been success stories of such small companies zooming to success. In such cases, their investors are the ones who get the most benefit.
Their initial investment is low but the dividends and potential sale price of the stock reach amazing heights giving them huge profits at times. Of course the future of a company cannot be predicted with accuracy and investing in these stocks is very risky.
Classification Based on Rights of Shareholders
There are two main categories of stocks based on rights of the shareholders:
Preferred Stocks
Preferred stocks are those whose owners are guaranteed a fixed dividend irrespective of the profit earned by the company. This assured return is counter-balanced by limiting the voting rights of these shareholders. Thus, a preferred shareholder has very little control over what the company does or how it performs.
The second advantage given to preferred stockholders is that they are given priority if the company is liquidated to pay off lenders. Claims of preferred shareholders are fulfilled as soon as the debts of the company are paid off.
Common Stocks
Common stock holders have voting rights in the company’s major decisions. The dividend payable on these shares is left to the company’s discretion and it can vary significantly depending on the financial situation of the company. This means a greater risk for the common shareholders when compared with the risk borne by preferred shareholders.
Classification Based on Nature of Returns
Income stocks
Income stocks are those which yield a steady dividend year on year. Although there isn’t much growth in the value of the stock, the investor is virtually guaranteed a consistent income with such stocks. Typically, companies in stable sectors like telecom, have this kind of stocks.
Value stocks
Value stocks are those which are going through a dormant period but have a lot of potential. The company has sound finances and is successful in the industry but the stock value is subdued at present for some other reasons. Long term investors prefer these stocks which they often hold for years, until the true value of the stock begins to emerge in the form of dividends or rapidly increasing share price.
The kind of stock you should invest in depends on many factors – the investment amount you can afford, the period of investment, the frequency and magnitude of returns you desire and the risk that you are willing to take.
Next Chapter: Functioning of The Stock Market
