Stocks, company shares, equities—whatever you call them, they are an integral part of most investors’ plans to grow their wealth. Understanding the different types of stocks and how they differ can help you understand what makes them valuable or not.
A stock represents a fractional ownership of equity in a publicly traded business. Depending on the type of stock, it can also give its holders voting rights or other benefits, including dividend payments or the ability to sell their shares.
Companies issue stock to raise money for growth projects or pay off debt. They can be publicly traded, or privately held (as is the case with many small businesses). There are regulated markets for public stocks, like the New York and Nasdaq exchanges, and less regulated private markets where only wealthy and accredited investors can invest.
Purchasing and selling stocks is done through a brokerage account, where you type the ticker symbol of the stock you want to buy or sell into the broker software and it completes the transaction for you. A stock’s value can go up or down depending on how popular the company is, how well it is performing, and the overall market conditions.
There are two main kinds of stock: common and preferred. Common stock is the kind that most individual investors own—it gives you proportional ownership of a company and voting rights. Preferred stocks don’t come with voting rights, but they do have an advantage over common stock in the event of a bankruptcy: earnings are paid to preferred shareholders before common shareholders receive their share of the remaining assets.
While it’s possible to invest in a single stock, it’s usually more efficient to hold investments through a mutual fund or exchange-traded fund, which will automatically buy and sell a mix of stocks to keep your portfolio balanced and diversified. These funds can also reduce your management fees and taxes, and they may be a good way to start investing in the stock market if you’re a beginner.
A company’s stock can also be grouped by sector, which is an area of the economy where companies operate. This can influence how your investment performs because sectors tend to react in predictable ways when economic conditions change. For example, if people stop spending on luxury items like tech gadgets and clothing, stocks in that sector can decline. But, if people are still spending on necessities, stocks in sectors like consumer staples and health care should stay stable.
Another stock metric is “stock outs,” which measures how often a business can’t fulfill customer orders because of a lack of available stock. This can lead to customer frustration and reduced loyalty, so it’s important for companies to manage inventory carefully.
