What is a stock?
Benjamin Franklin famously said, “Money makes money. And the money that money makes, makes money.”
It’s Financial Literacy month and today the topic of discussion is on stocks. Investing is key to having your money, make more money.
If you would like to reach financial independence, you will need to earn, save, invest and repeat. One of the best ways to secure your future, is to invest in the market.
When it comes to buying stocks, one size certainly does not fit all. There are different types of stocks that are suitable for difference types of investors. Depending on your appetite for risk, choosing a specific stock type can help you to navigate the market and help you to achieve your financial goals.
What is a stock?
A stock, also known as an equity, is a security that represents the ownership of a fraction of a corporation. Stocks are typically bought and sold on stock exchanges i.e. TMX, NASDAQ, FTSE, etc. Companies typically issue and sell shares to raise funds for a variety of business initiatives and projects.
To kick things off, let’s talk about the main types of shares - Common Shares and Preferred Shares.
What is a common share?
When someone refers to a share in a company, they are usually referring to common shares (stock). When you own common stocks you will have the ability to vote, which increases proportionally with the more shares the investor owns. Sometimes, common shares will come with dividends - this is when company’s share a portion of the profits with their investors.
What is a preferred share?
Preferred shares are often considered to be a bit safer than common stock but the investors who hold these types of stocks do not have voting rights but often receive regular dividends that is fixed for a specific time period.
What are the difference types of stocks?
As you learn about stocks, below is an explanation of the 6 main stock classifications which can help you create an investment strategy that is suitable to your risk tolerance, personal goals and needs.
BLUE CHIP Stocks
These are high quality stocks that often deliver predictable earnings. These stocks are often seen as boring but don’t let this deter you for considering these tried and true, yet slow and steady stocks.
Example of blue chip stocks include, AT&T, McDonald’s, VISA, Procter & Gamble, IBM and Intel.
When started to build our portfolio, blue chips are a good place to start to invest as these stocks have often shown good returns without too much of a risk. BUT with all stocks, you need to only invest what you can afford.
PENNY STOCKS
A penny stock typically refers to a small company's stock that trades for less than $5 per share and trades via over-the-counter (OTC) transactions. The price of these shares may be low, but these stocks can also be volatile. If you are a risk taker, penny stocks can provide you with an adrenaline rush that other stock types can not offer.
If you are interested in adding penny stocks to your portfolio, check with your financial advisor before investing and if you do choose to invest, start with a small percentage of your portfolio on these stocks.
INCOME STOCKS
These stocks have long and sustained records of paying dividends. These stocks usually have low growth and are seen as safe. Usually older investors leverage income stocks because this age group tend to focus on income over growth.
DEFENSIVE STOCKS
Not to be confused with defense stocks, defensive stocks are countercyclical, they tend to do well when the economy is in a bit of a flux because these companies sell products that the majority of the population uses, i.e. Public utilities, consumer goods such as Wal-Mart,
If you are looking for place to put some money when the economy is in a slump, defensive stocks can be a safe haven until the investment landscape improves.
DIVIDEND STOCKS
Likened to a bonus, dividend stocks provide the investor with a payment, usually quarterly, for simply owning shares of the company. Not all companies pay dividends, this is usually done by older, more established companies that have a history of positive growth and expansion.
CYCLICAL
These stocks tend to move with the cycle of the market/business and are tied to the general state of the economy. Companies that are related to this group of stocks include companies that have capital equipment spending, or durable items like houses, cars, etc.
SUMMARY
If you would like to reach financial independence, you will need to earn, save, invest and repeat. One of the best ways to secure your future, is to invest in the market.
What stocks have you invested in?
REMINDER:: BEFORE buying any stock/bond/equity, you need to conduct your own due diligence.