Subscribe NowJoin over 30,000 other Vintage Value investors today!

3 Types of Stocks to Explore

New and experienced investors alike are interested in good strategies for picking shares, but which approach you use depends on what you’re purchasing. These are three different types of stocks that are worth exploring for individuals who are interested in investing.

Penny Stock

Image via Flickr by jalexartis

Penny stock trading deals in shares valued at less than $5 each. In fact, many are listed at less than a dollar apiece, which makes them very affordable. Though you can build a large portfolio since shares are so cheap, you still need to use the same criteria for finding good opportunities as you would for common and preferred stock.

You’ll find penny stocks on markets like NASDAQ and NYSE, but many are listed on over-the-counter markets. You can find these in pink sheets. The volume of cheaper shares on these markets may make them seem enticing, but keep in mind that these companies aren’t held to the same reporting standards and regulations as they are on the NASDAQ or NYSE. It’s advised that you avoid pink sheets for this reason. If you do explore these less-regulated markets, you’ll have to do much more background checking on a company to ensure it’s legitimate.

Another problem with going off markets like NASDAQ and NYSE is that shares valued at less than $1 probably won’t yield returns worth your time. It’s better to stick to your due diligence and find reputable companies offering shares valued between $1 and $5.

Common Stock

When a company needs more capital than its early investors and founders can provide, it may go public and issue shares for sale on markets like NASDAQ, NYSE, and Dow Jones. If you purchase these shares and retain voting rights, you own common stock. You’ll generate returns through capital growth and have the option to sell your shares partially or entirely at a future date.

To avoid the risk of things like investing in a company that goes out of business, you need a solid strategy for purchasing common stock. This means checking:

  • The company’s background info, such as its growth plan, mission statement, and investment strategy.
  • Its overall financial chart to determine long-term profitability. In general, the most favorable chart pattern for any company is consistent growth. You can look at more nuanced data, such as that found in candlestick charts, to pinpoint the best time to buy (i.e., when the price is at a low point).
  • Its price-to-earnings ratio, which will help you determine if one stock is worth investing in over another.

Preferred Stock

With preferred stocks, the shareholder doesn’t have voting rights. However, the shareholder is entitled to dividends, which is a portion of the total profits earned. It may take a while to earn anything from dividends, though, since many businesses reinvest their profits to promote more growth. If you want to invest in preferred stock for the benefit of dividends, check what the company guarantees in terms of returns. You also have to consider stock classification when investing.

Purchasing stock can be an excellent asset. Remember to keep these strategies and tips in mind as you continue to research your options.