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Types of Stocks: What They Are and How to Use Them

Types of Stocks: What They Are and How to Use Them

When starting to trade stocks, there is a lot to learn. By getting to know most of the basic terminology and techniques, you can start to make smart stock investments. Get familiar with the main types of stocks and how to use them.

How the Stock Market Works

The stock market is where you can buy and sell stocks. It consists of different exchanges, such as the New York Stock Exchange and NASDAQ. Smaller companies often sell over-the-counter stocks. They are known as penny stocks since they typically trade for less than $1 per share. In order to make trades, you must work with a brokerage firm that handles these transactions on your behalf.

The goal of trading stocks is to buy and sell at the right time. When a stock goes favorably in your direction, you can make a profit. For example, if you purchased a stock share for $10 and it increased to $15, you could sell it for a $5 profit.

Types of Stocks

When companies go public, they split up their stock into shares. When you purchase these shares, you gain some ownership over the company. Stocks are a way investors can bet on the growth of an organization. Here are the two main types of stocks:

  • Common stock: You own a share in the company’s profits. You also get the right to vote on important company decisions. Common stock owners often receive dividends, which are regular payments.
  • Preferred stock: This type of stock is often compared to a bond since you are paid a fixed dividend. With preferred stock, you get preferential treatment, meaning you get paid first in situations like bankruptcy and liquidation.

How to Choose the Best Stocks for You

When choosing between common stock and preferred stock, you need to consider the pros and cons of each one. Each stock has benefits, depending on what kind of investor you are. The key is to determine where you see a company’s growth headed.

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Investors often pick common stock if they are looking for long-term growth. Common stock has more potential for long-term returns and gives the shareholders more say over the company’s actions. One drawback is that dividends are not guaranteed with common stock. Even if you are paid dividends, they are often lower. These kinds of stock also experience more volatility. If the company suffers bankruptcy, you lose your investment.

Preferred stock is beneficial because its dividends are usually high, fixed, and guaranteed. Investors looking for a steady income tend to pick these types of stock. If a company goes under, you are still likely to recover some of your investments. Likewise, preferred stocks tend to be less volatile than common stocks. However, there isn’t much potential for long-term growth, and you typically do not get any voting rights.

As a new trader, it’s smart to start with low-stakes investments and build your way up. This way, you can work on getting comfortable with the stock market as you learn the best techniques.

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