Stocks can be a great way to build wealth over time and even have the potential to help you retire early. However, not all stocks are created equal. There are a few different types of stocks that you need to consider before putting your money into this market. Wilmington, NC, resident Darrin Eakins reminds us that each type of stock has its own set of advantages, drawbacks, and risks. The type of stock you choose to invest in could have a big impact on your portfolio over time.
Thinking about buying stocks? Here is some helpful information about the 7 types of stocks that you should know about first:
What Is a Stock?Â
A stock is a share in a company. Instead of purchasing the entire organization, you can buy just a portion of it through an individual stock. When you invest in stocks of a company, you’re buying its shares – some ownership.
Types of Stocks
Common stocks
Common stocks are shares in a company that trades on public exchanges. Holding stocks in your company means you’re entitled to all of the rights that come with owning stocks in that firm. For example, you’ll have voting rights and the right to cash dividends.
Preferred Stock
Preferred stocks give you the right to be paid before common stocks if the company is liquidated. Preferred stocks also typically give you voting rights and higher dividend rates than common stocks. However, preferred stocks can have lower yields, too.
Rights Issues
Rights issues allow you to buy more shares of a company at a discounted rate. If you’ve got company shares and want to buy more, you can do so at a lower price than buying them on the open market. Its downside is that it imposes dilution on your current shares. Darrin Eakins says that your ownership percentage will be diluted over time. As a result, it can affect your earnings potential.
Investment Company Shares
Darrin Eakins explains that investment company shares are typically stocks of public companies that a third party manages. You can purchase these shares through a brokerage or mutual fund company. Sometimes, the firm will have a 401(k) or other retirement account and you can contribute to it through those types of accounts.Â
Exchange Traded Funds (ETF)
Exchange Traded Funds are a diverse basket of stocks that you can trade as one unit for the price of a single stock. ETFs are diversified and let you invest in separate sectors such as technology or healthcare. They’re also less expensive than mutual funds.
Limited Partnerships
Limited partnerships are typically found in the energy and real estate markets. This type of stock is an investment in a company rather than an ownership stake in the business. But you won’t have control over the company you invest in. Darrin Eakins adds that you also won’t be entitled to any profits from the company’s business unless it is distributed to shareholders at the end of a fiscal year.
Once you’ve learned about all the different types of stocks, it’s time to pick the one that’s right for you. There’s a lot to consider, and it can seem like an overwhelming process. But once you figure out the type of stock that will work best for your goals, you can start investing confidently, knowing that you’ve made the right decision.
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