In this video, we will go over the different types of stocks an investor will encounter in the stock market.
Stocks are separated mainly into two types, common and preferred stocks. However when you start buying stocks you will encounter many other categories which we will expand on in this video.
So, starting with the two main types of Stocks:
First, Common stock is a security that represents ownership in a corporation. The majority of stocks issued by companies are common stocks. When you own a common stock, it gives you the right to vote on board members and other corporate issues at a company’s annual meeting.
Generally, one share equals one vote. An investor holding five shares of Apple, for example, would only have five votes. In Apple’s case there are more than 16 billion shares, and as you can understand 5 votes in such a vast amount of votes means nothing.It is also possible to have non-voting common stock.
Some common stocks also pay regular dividends ( this is a subtype which goes by the name Dividend stocks, which we will expand further on in this video) Keep in mind that the payouts are never guaranteed and most likely vary. One downside of common stock is that its shareholders are last in line to be repaid if the company goes bankrupt.
The second type is Preferred Stock. As mentioned earlier, the majority of public companies have common stock, but some issue shares of what’s called preferred stock. This type of stock offers some of the advantages of common stocks and bonds in a single security. Preferred stock pays its holders guaranteed dividends, in addition to a chance for price appreciation like you get with shares of common stock.
If a company’s common stock pays dividends, the preferred stock dividend may very well be higher. Preferred stock shareholders are also more likely to receive some kind of compensation if the company goes under.
One more difference is that the company can choose to buy back preferred stock at its option.
In addition, shareholders may have the option to convert their preferred stock to common stock.
Like Common stocks , Preferred stocks have a downside and that is that preferred stockholders don’t have any voting rights.
To summarize, all stocks in the market are either Common or Preferred, however there are plenty of categories that you will encounter when you start investing or trading, like the following:
A very common way to categorize stocks is by market capitalization, or market cap. This is the value you get when you multiply the total number of a company’s shares by its current stock price.
For example, in Apple’s case you multiply the number 16.071billion with its current price of 150.70$. The amount you should get is close to 2.4 Trillion dollars. Fortunately for all of us websites like TradingView, Yahoo Finance and others provide that number to us.
On TradingView you can see the market cap on the stock review page.
So, Public companies in the U.S. with a market capitalization of $10 billion or more are categorized as large-cap stocks.
Examples of large cap stocks are Apple which for the record was the first company to be worth 3 trillion dollars , and so on. All the companies mentioned are way above the 10 billion mark, perhaps they need to reconsider the number.
Anyhow, their tremendous size and influence over markets offer investors greater stability and less risk since such large-cap companies often can navigate through tough periods much easier than smaller companies. Think of 2008, and even keep an eye on the market today, as this will be a very tough period for stocks. Larger companies have the funds to survive and prevail in the long term, compared to smaller companies.
One downside of large-cap stocks is that companies of this size tend to grow slower than newer, smaller companies. That means investors shouldn’t expect massive returns from investing in them.
Moving on, Companies with a market capitalization between $2 to $10 billion are called mid-cap stocks. Mid-cap companies combine the stability of established businesses with more of the growth potential of smaller companies.
Mid-cap stocks can offer the potential for growth as they expand their share of the markets where they do business. Plus, they’re often the target of mergers or acquisitions by large-cap companies.
When one company , let’s call it company A buys another Company B, the stock price of the Buying company ( Company A) tends to dip temporarily, while the stock price of the target company ( Company B) tends to spike. The acquiring company’s share price drops because it often pays a premium for the target company, or incurs debt to finance the acquisition.
Last, the Small-cap stocks are U.S. companies with a market capitalization of $300 million to $2 billion. There are many times more small-cap companies than the number of large-cap and mid-cap stocks combined.
Small-cap stocks offer investors huge opportunities for growth, and the small-cap market is made up of a lot of future mid-cap and large-cap companies. At the same time, these stocks are among the riskiest investment options since small-cap stocks experience heightened market volatility.
Additionally, small-caps can also include companies facing bankruptcy and companies that are ripe for acquisition. Investing in small-caps pairs the possibility of impressive gains with the potential for major losses.
Another way to categorize stocks is based on two popular investment methods. Growth investing and Value Investing.
Growth investors tend to look for companies that are seeing their sales and profits rise quickly. On the other hand Value investors look for companies whose shares are inexpensive, whether relative to their peers or to their own past stock price.
Growth stocks are companies that are expanding their revenues, profits, share prices or cash flows at a greater rate than the market at large. The goal when investing in growth stocks is seeing strong price appreciation over time. However, growth stocks offer more potential for volatility since these companies are more likely to be taking risks to achieve that growth.
Growth companies tend to reinvest their earnings into the business and may not pay dividends. While many growth stocks are smaller companies that are new to the marketplace, that’s not always true in every case. But most of the time, growth companies are strongly focused on innovating and disrupting their industries.
Value stocks on the other hand are the shares of companies that are on sale. To put it another way, value stocks are strong companies that are being underpriced by the stock market. Value investors try to uncover companies in the value stock category, buy their shares and wait for the rest of the market to wake up to their true value.
Lets stop here for a second, because to understand value stocks you need to understand Price to Book ratio and Price to Earning ratio.
The price-to-book ratio (P/B) is calculated by dividing a company’s market capitalization by its book value of equity as of the latest reporting period. Alternatively, the P/B ratio can be calculated by dividing the latest closing share price of the company by its most recent book value per share.
Using Tesla as an example, let’s calculate the price to book ratio: The market cap is 950 Billion and the book value of equity or total equity which can be found in the balance sheet and is the total assets minus total liabilities is 31.58 Billion. If we do the calculator the result we get is around 30. Now if you look at the statistics of Trading view that number is at 36 for 2021, but consider that the price of the stock was higher which means their market ca was higher.
Anyhow any value you get below 1 is considered to be a good Price to book ratio for value investors, as it indicates a potentially undervalued stock.
The price to earning ratio (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.
To calculate the Price to earning ratio you need to divide share price with Diluted Earning per share. USing once more Tesla as an example we can find the stock price in the board and the diluted earning per share in the income statement. If we do the calculation the number we will get is 109 as I divided 303 with 2.77. Always use current numbers which is the TTM, or Trailing 12 month.
Investors and analysts consider stocks which have a P/E ratio of 50 or above to be an overvalued share,in the case of Tesla this has been the case for years, but eventually it will come to its normal state. On the other hand a stock with a price to earning ratio of 10 or below is considered undervalued.
To summarize for an undervalued stock P/B is below 1 and P/E is 10 or below.
Usually, Stocks that look favorable by these common investment analysis ratios may have had their share prices depressed by broader market developments unconnected to the specific developments in their businesses or industries.
There are plenty of other types of Stocks explained in the video, like International Stocks, IPO Stocks, Blue Chip Stocks, Penny Stocks, Dividend Stocks etc.
Also check the video How To Make Money In The Stock Market !
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