Investing in the stock market does not usually mean just picking one company’s shares, and then forgetting the investment. There are several different shares that people should understand. It’s a good idea to diversify investments across categories to ensure that it’s possible to avoid losing everything if one company goes under. Here are four categories of investments that all investors should understand.
These stocks are related to consumer staples. Every investor should keep some of these shares in her portfolio. The stocks that make up this sector of the economy will usually go down less than the market as a whole when there’s a recession. This is because people still need to eat and buy gas during an economic downturn.
Another category of stocks that investors should understand is a group known as growth stocks. They have this title because the companies that issue them are currently in the growth phase. They are not mature, and they might go up and down more rapidly than the defensive sector that produces consumer goods. These stocks can trade at higher price-to-earnings ratios because investors expect them to grow. Therefore, investors will frequently pay a premium to own these companies.
Growth stocks will frequently avoid paying dividends. The goal is plowing all net income into the growth of the company. As companies start to mature, they need less revenue going toward growth. Therefore, they can start paying out dividends. These cash payments can be a big source of positive reinforcement for investors. They are a source of cash flow that can go toward whatever an investor chooses. Dividends can buy more shares of a company, or they can go toward everyday cash flow for bills. A diversified investor should have some shares in dividend-paying stocks.
Initial Public Offerings
These stocks are more speculative. IPOs are companies that have just gone public. Sometimes, a company that’s in the growth period will see its share price increase rapidly immediately after going public. Getting in on the ground floor of a newly public company can be a great way to build wealth. Therefore, investors should understand that buying shares of an IPO is risky, but they can pay off over the long run.
A well-balanced portfolio will likely have a range of shares or funds that cover each of these types of stocks. People who are starting might focus on one of them for a while. However, over time, it’s a good idea to build out positions in a range of stock categories.
About Raging Bull Trading
Raging Bull Trading is a trading program that teaches both new and experienced traders about the art of trading and the stock market. Originally launched in 2010 by professional traders Jeff Bishop and Jason Bond, Raging Bull Trading offers a comprehensive course on mastering stock trading from industry experts. The program includes lessons on stock picks, stock ideas, how to get started in trading, and an overall stock market education.