When getting started in investing, the stock market may be among the first places you look. After all, public equities like stocks are more prevalent in the sphere of common knowledge than other asset types. However, before putting all your funds into the stock market, you should be sure to conduct sufficient research to ensure your investments have potential. Understanding the way stocks are organized into classes can help you determine the profitability and security of each individual stock.
The two most popular classifications include common and preferred stocks, but there are additional classes that you should also recognize and understand.
As the name suggests, common stocks are what is generally referred to in conversations about shareholding. When an individual owns common stock, they have some say in the composition of the company’s board as well as an appropriate portion of the company’s profits. Common stocks pose more risk than other investments, but they also present the highest opportunity for capital growth.
Preferred stocks are distinct from common stocks as they do not represent ownership in a company and are more geared toward steady growth over a long period of time. Because they are less volatile than other stock options, they also have limited potential for value increases.
Though these classes are the most common, there are other means of categorizing stocks. Knowing what to look for in stock options can help you make profitable decisions in regards to your investment portfolio.
Market capitalization, or market cap, refers to the size and valuation of a company. This classifying characteristic can be important in your investment decisions because the size of a company can greatly influence the risk involved. A large company, for instance, poses less risk than a small business. Naturally, this should not be the sole factor you consider, as the size and value of a company is not necessarily indicative of its potential for success and growth.
Diversification is essential for investors who want to avoid unnecessary risk in their portfolios. When investing in stocks, it is important to consider the diversity of your investments, as well. In the stock market, stocks are divided by industry or sector. It is reasonable to assume that shares in the same industry (such as automotive or technology) will be similarly affected by specific economic events. To avoid experiencing a devastating loss of value in your portfolio, diversifying your investments by sector can help minimize great risk.
Along with the classifications described above, stocks can also be classified by location and style. Taking the time to learn about the classifications of stocks can help you ensure your portfolio is both diversified and profitable.