How to Pick the Best Type of Stock for Your Portfolio

Founder and CEO Bernie Schaeffer defines different stocks

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There are dozens of different types of stocks you can buy on the stock market today. But what are they? And how do they differ? It's essential to understand the categories of stocks to help guide your research and make more intelligent investment decisions.

When you initially start looking into the stock market, it can seem complicated. This is because there are so many terms, concepts, and even types of stocks to consider. Essentially, there are only two major types of stocks that anyone will ever be looking at buying or selling. These two broad categories are what I'll be discussing in this article.

Some classifications refer to stocks that fall into different categories, albeit with some overlap between them. There are also classifications related to ownership of stocks. Here's an introduction to the major types of stocks that you'll find on today's market.

Understanding the ownership classes of stocks

There are two main types of stocks that you can buy on the market today: common stock and preferred stock. Here's what you need to know about the two types of stocks to see if one would be better for your investment goals than the other.

Preferred Stock

Preferred shares receive special status in a company's capital structure making them a safer kind of stock to own. Because preferred shareholders come before common shareholders when a company is liquidated, they have a greater likelihood of recovering their invested capital in the case of a bankruptcy or takeover. In return for this added safety, preferred shareholders receive a slightly lower dividend yield than common stockholders.

Common Stock

When you buy a share of common stock, you become part-owner of the company. As an owner, you are entitled to share in the profits of the company. In addition, as voting stock owners, you are permitted to vote on various matters, including the election of directors and auditors, changes in control of the company, amendments to the articles of incorporation or bylaws, and mergers or other issuances of securities that would prejudice your interests.

Different types of stocks are related to income and revenue

There are several different types of stocks to choose from, depending on an investors' preferences. Understanding the different types of stocks and how they benefit you as an investor will help you make the right decision for your portfolio. Of course, you can always sell stocks for immediate income and cash or keep them as long-term investments, but here are the different vehicles to take you on the ride.

Income Stocks

These stocks can be found in large and stable companies, primarily real estate, natural resources, and energy sectors. This type of investment generates a steady and stable income, often in the form of a dividend. Experts consider them to have a low level of volatility and to offer a high dividend payout ratio. However, you will find fewer opportunities to invest in this type of stock.  

Large-Cap, Mid-Cap, and Small-Cap Stocks

For cautious investors, large-cap stocks are generally considered to be more stable but less growth-oriented. Mid-cap stocks are somewhere in between yet carry more risk. Finally, small-cap stocks are considered high-risk, high-reward investments with room for rapid growth if they're successful. The best way to define these terms is through market capitalization, which considers the number of shares outstanding and gives investors an idea of how many shares would be available if all were sold on the open market.

According to Dmitriy Bobriakov of YouHodler, "The best piece of advice for trading large-cap stocks is to look at the past and learn from it. You can do this by reading and studying and analyzing and researching and comparing charts. You will then be able to identify your strengths as a trader, as well as those of your competitors, which should help you in improving your skills."

Blue-Chip Stocks

A blue-chip stock is a large, financially stable stock that is usually one of the leaders in its field. Blue-chip companies have been around for a long time, and their stocks don't grow much because the price is already high. The names of these well-known companies are as recognizable as household brands like Microsoft (MSFT), Visa (V), Coca-Cola (KO), and Johnson and Johnson (JNJ).

Speculative Stocks

Many speculators who are well-versed in the market investment strategies now consider speculative stocks as their prime investment choice. Many people often say that speculation is bad, but it doesn't necessarily mean that speculating in stocks is terrible. It's a fact that the market goes up and down, and for an investor, it can be wise to take advantage of these conditions. The goal is to earn money while the market goes up and then recover losses when the price starts to fluctuate. And one of the most important things to do is try to buy low, sell high. That's what speculative stocks are about.

Dividend Stocks

Many stocks make dividend payments to their shareholders regularly. Dividends provide valuable income for investors, making dividend stocks highly sought after among certain investment circles. Often, investors reinvest dividends back into their portfolios to increase their holdings. Then, the dividend payout increase over time to increase the revenue of the shareholder.

Growth Stocks

Growth stocks sound like a stock trader's dream come true. The goal is that such companies will continue to increase in value and that their share prices will keep going higher. However, certain risks go along with them because these companies are growing faster than others. If growth expectations are not as anticipated, eventually, shareholders might lose money because the share prices will drop. This inevitably leads one to ask whether investing in growth stocks is worth it after all. 

Tech Stocks

It's incredible how the share prices of technology companies impact the whole world. The technology sector has become a significant driver in the overall stock market. You've probably heard how the internet created the need for specialized hardware. The Internet still does that, but it also needs enormous amounts of data to be moved instantaneously, which requires special software created by software developers paid by the communications equipment companies, who need networks built by construction companies, using communications cables made by cable operators, using servers produced by computer hardware manufacturers, who software companies pay.

The technology sector creates numerous opportunities for investments from the largest blue-chip technology companies to the smaller manufacturers.

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