The Different Types of Stocks and their Suitability for New Traders
With the stock market valued at around $80trn and offering traders ample opportunity to generate profits, both in the short and long term, it remains one of the best overall investment vehicles. For new traders, in particular, the stock market is very accessible as it is possible to start buying and selling shares with only a small capital outlay.
While the word “stock” in the stock market covers all of the stocks traded by retail and institutional investors, there are different types of stocks you can buy, each with unique characteristics. It is important to note that these terms are not always set in stone for each stock. For example, a stock could initially be a “growth” stock and then mature into a “value” stock in the long term.
Common stocks
First and foremost, most stocks that traders buy and sell are called “common” stocks, a term that represents ownership in a company. According to the guides on bitalphaai.app, when a company goes public with an IPO, investors are given an opportunity to buy common stock. This stock is then traded, and anyone who holds stock in a company can potentially sell it for more later to generate returns. That usually happens when a company grows, becomes profitable, and increases its market cap.
Growth stocks
Two popular investment methods focus on growth and value stocks, with each one offering different levels of risk and potential returns. A “growth” stock is growing at a greater rate than the broader market and has the potential for significant gains when sold. This growth is evident in both its earnings and revenue. However, growth stocks can be more expensive than value stocks and thus, carry a higher risk.
Value stocks
In contrast, “value” stocks are lower risk as they are deemed to be undervalued and are priced lower than what investors perceive to be their actual market value. A trader might opt to buy a value stock if the company has solid fundamentals and could generate returns if held for an extended period. Value stocks are not well suited to tactics such as “scalping” as the pricing is more stable, making it difficult to eke out gains in the short term.
Penny stocks
New traders may be attracted to “penny” stocks as they are very affordable with a price of less than $5 per share. These low-cost stocks can be traded on larger exchanges, such as the New York Stock Exchange or Nasdaq, but they are more commonly found over the counter (OTC). Due to the low price, you may be surprised to find that penny stocks are considered a high-risk investment as they have higher levels of volatility. That might make them a poor choice for new traders.
Blue-chip stocks
In contrast, blue-chip stocks are generally viewed as a safe bet. They are defined as industry-leading companies with solid finances, a large market cap and an excellent reputation. Such stocks are listed in the Dow Jones 30 or the FTSE 100. Popular blue-chip stocks include Amazon (AMZN), Apple (AAPL), Coca-Cola (KO) and Microsoft (MFST). While these stocks may not consistently deliver the best returns in the short term, they are usually very stable and lower-risk investments.
Other types of stocks traders can buy and sell include:
- Environmental, social and corporate governance (ESG) stocks that prioritise excellent social justice and green policies based on factors like carbon emissions
- IPO stocks issued when a company goes public and is first listed on a stock exchange
- Income stocks that distribute profits to shareholders at a higher rate than the market average
- Cyclical stocks affected by company performance and non-cyclical stocks that are deemed “recession-proof”
What stocks are best for newbies?
Before you select stock types, it is helpful to read up on how to get started trading stocks. Trading will involve finding a broker, opening an account, researching stocks, formulating a strategy, and then placing an order for shares. As a new investor, blue-chip stocks are a safe bet as they are a known quantity and quality and typically perform well over time, so you can go long and hold them and potentially generate gains. Be informed by reading https://tradingoptionsforbeginners.medium.com/the-best-options-trading-alert-services-and-products-2abe8f159795 before investing your money.
However, growth and value stocks can also be useful depending on what you want to achieve. Many investors opt to diversify their portfolios with a mix of stocks. Hence, they are not all in on one particular stock type, which can be risky if the economy or market changes direction. And selecting stocks is just one part of the equation. You need to manage your portfolio and enter and exit the market at the right time to succeed.