How to Classify Stocks
Stock is an ownership position, or equity, in a company that issues it. Unlike bonds, which operate more like loans made by creditors to companies, stocks give shareholders fractional ownership in a corporation, a unique feature that allows them to vote at shareholder meetings and receive dividends as well as to get their money back if the business fails. The type of stock, whether common or preferred, you hold determines if you can take advantage of these privileges. The way stock is classified also affects how you can make and lose money on it.
Investing in stock can be risky, but investors have the opportunity to make money if they do their research. One of the best ways to find out if a stock is worth buying is to look at its past performance and current market trend. In addition, you can look at factors such as a company’s management and the industry in which it operates to help determine its future potential.
There are many different ways to classify stocks, based on the size of the company, the industry in which it’s located and more. Some of these designations are: blue chip, which means that the company is well established; large-cap, which refers to a large company with a high degree of stability; small-cap and micro-cap, which refer to smaller companies that are growing rapidly; growth, income or value, which point to stocks with prospects for increased returns, future dividend payments or stock price increases, respectively; and cash flow, which indicates how much profit a company has.
In addition to looking at these factors, you should also consider a stock’s intrinsic value. A stock’s market price reflects the collective appraisal of its worth at a given time, but this valuation can change quickly based on investor emotion and other factors outside of the company’s control.
For example, if a stock is trading at a higher price than its intrinsic value, then it’s more expensive than it should be and is overvalued. This can cause people to stop buying it and the price will drop. However, if a stock is selling for less than its intrinsic value, it’s considered to be undervalued and is more likely to gain in the long term as demand rises.