If you’re even slightly new to investing, then it’s imperative to know the basics before you get too deep in the process. One of the most basic things you should learn about the stock market is the types of common stocks that exist. When people talk about stocks in general, they’re most likely referring to commons stocks.
The vast majority of stocks are issued in the form of common stocks. When you buy “common shares”, each share that you purchase represents your partial ownership, or stake, in a company. It’s essentially staking your claim for a portion of the dividends (read: profits) that the company generates. They may go up or down depending upon how the company performs.
In addition, when you buy common stocks, you become an investor in a company, meaning that you get a vote for each share you own. This vote can help elect board members depending upon the amount of stock you own. Let’s take a look at five of the types of common stocks that are out there.
1. Penny Stocks
Don’t invest too heavily in penny stocks unless you’re feeling risky. They’re the most speculative form of stocks around. The rule of thumb for a stock to be considered a true “penny stock” is whether it’s priced at $5 or less per share. If it is, then you have yourself a penny stock. Companies that sell penny stocks are not quite established yet – and most are still deep in the development phase of their growth. A second kind of penny stock company is the kind that is offered by a company that is flailing financially. Penny stocks for either type are highly risky because there’s a huge chance that the companies you invest in may fail.
2. Blue Chip Stocks
The biggest companies in the world – think Wal-Mart, Google, and the like, only offer blue chip stocks. These companies have higher-priced shares with little room for growth, but who cares? Adding a healthy mix of blue chip stocks to your portfolio will lend a great amount of stability to it because the likelihood of these companies failing is extremely low, and returns are as close to guaranteed as you’ll get in the stock market.
3. Utility Stocks
Utility stocks are simply stocks issued by companies that offer public works services such as power and water. There’s limited competition since most of these companies almost have monopolies in the areas they service. That’s why utility stocks are low-risk, because their returns are almost guaranteed. However, the amount you’ll profit is marginal.
4. Emerging Growth Stocks
Emerging growth stocks are offered by up-and-coming companies that are still in the growth stage and figuring out the best tactics for management and company structuring. Investing in these kinds of stocks may not yield anything at first. There is a chance for huge rewards down the road, but there’s also the chance that you’ll have a bankrupt company on your hands. Companies that offer emerging growth stocks tend to be volatile while in development, plain and simple.
5. Established Growth Stocks
Companies that offer established growth stock have a proven track record, and they’re established enough not to be a high risk for bankruptcy. At the same time, the rewards are minimal compared to other types of stocks. There’s room for massive growth down the line, however.