- What they are: Securities that represent a portion of ownership in the corporation that issued the stock. Also called equities.
- Pros: Capital appreciation; many outperform other investments; may pay dividends; voting rights.
- Cons: Prices can fluctuate dramatically; you can lose your entire investment.
- How to invest: Full-service and discount brokerages; through a Dividend Reinvestment Program (DRIP)
- Tip: Many investors use a combination of technical and fundamental analysis when picking stocks and pinpointing good times to buy (and sell).
Companies issue stock to raise money for various purposes, such as paying off debt, launching new products, expanding into new markets and building new facilities. When you purchase stock shares, you buy a piece of the company – even if it’s just a tiny piece. Common stock (what most people refer to when mentioning stocks) gives shareholders the right to vote at shareholder meetings and to receive dividends. In contrast, preferred stock doesn’t come with any voting rights, but shareholders have priority over and receive dividend payments before common stockholders.
Stocks can be actively traded – day traders, for example, get in and out of a trade during the same trading session. But buy and hold strategies, where investors seek gains over the long-term, are the most common tactic. If you own stock, you make money if it appreciates in value and you sell it, and/or through dividend payments.
Stocks can be categorized by the size of the company, known as market capitalization – which represents the total dollar market value of all its outstanding shares. While the lines between different caps are not set in stone, general guidelines are:
- Mega cap: $200 billion+
- Large cap: $10 billion to $200 billion
- Mid cap: $2 billion to $10 billion
- Small cap: $300 million to $2 billion
- Micro cap: $50 million to $300 million
- Nano cap: less than $50 million
Stocks are also grouped by certain performance characteristics:
- Growth stocks: Earnings grow at a faster rate than market average. These rarely pay dividends, so investors seek capital appreciation.
- Income stocks: Pay consistent dividends, providing income for investors.
- Value stocks: Low price-to-earnings (P/E) ratios. Investors purchase in the hopes that price will rebound.
- Blue-chip stocks: Large, well-known and well-established companies with solid growth histories. These stocks almost always pay dividends.
Tips for Picking Stocks
- Consider your time horizon and risk tolerance, being mindful of your overall diversification.
- Look for stocks that match these objectives (e.g., blue chips tend to be slow and steady, growth stocks are riskier but the reward might be higher).
- Compare options: Fundamental analysts consider price and valuation, financial reports and dividend history. Technical analysts look at price charts and technical indicators to analyze past – and predict future – price moves. Many investors consider both the fundamentals and technicals.
- Do your own research: Don’t rely too much on what the analysts – or your friends – are saying.