Classes of stocks (part 2)
Stocks come in various types and there are different ways to classify them. In the first part of this article, we classified stocks according to market capitalization, their returns, or how risky they are.
Other ways of classifying stocks include classifications based on price trends, ownership, and risks.
Risk Values of Shares
Stocks differ in how risky they are and whether or not they are a safe investment (that is, the possibility of losing money when investing in stock).
In evaluating risks, you could use its Beta value to measure its volatility relative to the stock market. A negative beta value means that the stock is moving in the opposite direction as the market and a positive beta value means it is moving in the same direction as the market. Higher figures refer to more volatility.
Another measure of a stock’s risk value is whether it is a blue-chip stock. Blue-chip stocks are stable, premium, high-performing stocks.
Ownership Types of Stocks
When you buy a stock, you usually have ownership rights added to them but the extent or nature of that ownership is dependent on the type of stock you buy. There are different types of stocks based on ownership types including preferred and common stocks, hybrid stocks, and derivative-based stocks.
Common stocks are the most common types of stocks. They have the highest return potential and are also very risky. The risk is that in the case of potential liquidation due to bankruptcy, common stock owners are usually the lowest on priority receiving their money back. That is where preferred stocks come in.
Preferred stocks give more preference in the case of a liquidation. They however sacrifice voting rights in the company, as the stock type is designed for those looking to invest in a company without looking to take part in its daily operations. Preferred stocks however give guaranteed dividends and if you buy callable preferred stocks, a company may decide to buy back your shares at a premium.
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Hybrid stocks combine aspects of both common and preferred stocks. They differ in their characteristics and could even be a bond that is tied to a stock price. They may also have fixed or floating dividend rates and may give investors voting rights.
Stocks with embedded derivative options come with a special condition to perform a separate transaction somewhere in the lifetime of the stock and are traded attached to the stock.
Price Trends of Stocks
Stocks respond to changes in the market differently and to that end, they can change in price in response to certain market conditions. This means that you can use its price change to determine whether a stock is worth investing in. Based on price trends, stocks can be classified as defensive or cyclical stocks.
Cyclical stocks respond to market cycles of appreciation and depreciation and are indicative of financial assets that are traded more in turn with demand and supply, rather than the assets that are traded irrespective of how the market is doing.
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Defensive stocks are stocks whose price remains relatively stable regardless of the market. This is because they are assets of goods and services that are needed in constant demand, such as consumer goods. The demand for them hardly goes down.
Conclusion
Stocks come in different types and their differences portray their characteristics. Wise investors would capitalize on a thorough understanding of the types of stocks to make a good investment choice.
