Not all stocks are the same – some have higher growth potential than others. In your quest to build wealth and achieve financial freedom, you need to own stock in a few different types of companies. They will allow you to achieve higher returns on your investment than any other way, even if you only save money in a traditional bank account.
Here is a list of the 4 types of stocks that you will probably have to know about in the future.
1. Growth Stocks
Growth stocks are stocks that have high growth potential. The term “growth” is used in various ways, but it generally refers to earnings over time and revenue over time.
Companies that fit the growth category can be expected to continue growing their sales and earnings faster than the average company. The reason for investing in growth stocks is that most investors like to see a growing stream of income from their investments.
Therefore, an investor looking for capital appreciation will look for companies with strong earnings growth prospects. An investor who sees their money being put at risk will also like to see strong revenue growth.
Growth companies typically reinvest most of their current revenues into research and development (R & R&D) or advertising and promotion. The market typically prices stocks based on future expectations instead of past results, so a company’s stock will reflect what investors expect it to do in the future.
A company with good growth prospects should translate into higher stock prices, which is why investors like to invest in them.
2. Dividend Stocks
Dividend stocks, also called income stocks, are those that pay dividends. They represent a particular type of stock you might consider investing in. Dividend stocks can be attractive for several reasons. For instance, they allow you to participate in the growth of your business and its profits. When you buy shares in a company, you become a part-owner.
As the company becomes more profitable, so do your shares. The gains you make as an owner of the company can be either direct or indirect. The more money the company makes, the more you make on your investment; but you also can profit from increases in the share price if you decide to sell some or all of your ownership stake in the company.
In addition, many companies will “declare” dividends, meaning they will pay a portion of their profits directly back to shareholders. This usually happens at regular intervals, such as quarterly or annually, although some companies will declare dividends whenever they have significant amounts of cash to spare. You can get paid while doing nothing.
If you own shares in a dividend-paying stock and it declares an increase in its dividend payments, then as long as nothing goes wrong with that company and its share price doesn’t fall significantly below what you paid.
3. Income Stocks
Income stocks are companies that pay dividends. Most people look for stocks with high growth potential and will go up in value, but income stocks are interesting because they can also possibly provide some money while you wait.
4. Initial Public Offerings
When you buy shares in a company selling the stock for the first time, you are buying an “initial public offering,” or IPO. An IPO is a lot like buying a house. You’re buying something that doesn’t exist yet, and you’re paying for it with money that doesn’t exist yet.
The people who already own houses are unlikely to sell them for less than they’re worth, just as the people currently owning stock in a company are unlikely to sell it at a discount. But the people who buy houses from newly formed companies often make money and sometimes lose it. So why would you want to buy an IPO?
Because, like houses, companies sometimes increase in value. And even if they don’t, if you wait a while before selling, you might get back more than you paid.