The number of stocks is huge. Just as large is the number of stock tips and stock recommendations you constantly come across on the Internet. They all want to tell you about the one stock that is currently undervalued and whose price will rise sharply in the future. Predicting the future price trend of a stock with certainty is difficult but there are types that are almost certain to bring you a profit in the long run and those that are considered to be a lot riskier.
Most Profitable Stocks
In order to provide holders with different rights and obligations, stock corporations can issue different types of stocks. Some types make it easier to buy them while others can indeed be more profitable.
Among these types are:
- Common stock. These are the stocks in which investors invest most often. They represent ownership of a specific part of a company. They also grant shareholders certain rights: to receive dividends, to vote on the company’s board of directors, to participate in the management of the company, and to receive information about the company’s activities.
- Preferred stock. Also referred to as “Golden Stocks”, these carry no voting rights. To compensate, shareholders are granted privileged rights. For example, they can be entitled to a dividend, which is usually higher, or they can receive a higher residual value in the event of insolvency.
- Par value stock. These have a fixed amount of money that determines the size of the share held by a board of directors. The ownership interest is the sum of the nominal values held divided by the share capital of the corporation.
This diversity not only takes into account the interests of the issuing company but also enables shareholders to have different degrees of corporate ownership. Not all brokers offer every type of stock in existence for their clients, so if you want to take full advantage of the market find a broker that has what you need. Among popular online brokers are Brokstock.co.za, Fidelity, and Etrade.
Risky Stocks
Investments always involve a certain degree of risk. A thoughtful selection of financial instruments that match your investment objectives and risk profile will help manage the risk of “equities”. However, there are also risks that you have no control over – one of these is general market risk.
And while every stock investment carries a certain risk, some stock types are riskier than others:
- IPO stock. IPO, or Initial Public Offering, is when a previously privately run company is selling shares to the public via a stock exchange for the first time. Since the company has just released its stock, there is no guarantee that its price will actually go up in the long term, so this is can be a really risky investment.
- Single stock. Nothing illustrates the idea behind the stock market more clearly than the purchase of a single share. Anyone who buys it becomes a co-owner of the company that issued the share certificate. Investors thus benefit from the company’s profits – but may also have to take losses if the company falls into a crisis. Investors who buy single stocks need a lot of expertise and discipline. Otherwise, they risk making mistakes that will spoil their performance.
- Cyclical stock. The earnings of cyclical stocks fluctuate over relatively short periods of time depending on the economic cycle of an industry or an entire economy. A poor economic situation and the associated low demand for consumer goods have an impact on the earnings situation of these companies.
All types of stocks can be profitable for investors but to someone who just started investing, we can not really recommend these types.
How to Pick the Best Stocks
Picking the stocks to buy is a notoriously complicated process. But there are some basic tips that can help you to pick your first stocks and get your portfolio started.
Focus On Well-Known Companies
Since you are acquiring an interest in a company by buying a share, you should find out as much as possible about the company in advance. Familiarize yourself with the company: Where is it based? What does it do, what is its purpose, and what is its business model? Newcomers to the stock market should focus on companies that they know and understand.
Pay Attention To The Company’s Product
We recommend taking a close look at the product or service offered by the company. Are the products innovative and competitive goods or services? You can find information on trends and technical innovations online or in newspapers and magazines. These help you to assess whether the respective products can occupy a successful market position. As an investor, you should be convinced of the marketability of the products. Trust is a basic prerequisite for the success of an investment.
Check Facts And Figures
Key company figures are another important point. With a little common sense, you can understand basic key figures of the company valuation even without business management expertise. For example, the price-earnings ratio (P/E ratio) can be a useful indicator. It shows how high a company is valued – measured against its earnings. The historical P/E ratio of DAX stocks averages 15. A P/E ratio of 15 means that companies are valued at 15 times annual earnings. These companies, therefore, need 15 years to earn their own value through profits. Growth companies, whose business models investors have high expectations for, but which are not yet making profits, usually have a comparatively high P/E ratio.
Always Learn
Stock investors must constantly (or at least regularly) check the news, read up on new developments, and learn new things in general. Usually, everybody does it in their own way but one thing we can recommend is to read stock analysis.
The central task of stock analysts is the systematic evaluation of companies. Analysts usually specialize in individual companies and industries. Their results, called stock research, are made available to professional investors. These research reports are not always freely accessible, but the summary is sometimes published via news agencies, usually, in the form of a recommendation – sell, hold or buy; in each case with the expected price target.
An Alternative to Chasing the Most Profitable and Risky Stocks
If chasing profitable stocks is not your thing, consider investing in alternatives such as bonds or mutual funds:
- A mutual fund is a pot of money that comes from several sources and is to be spent for investment by the company. The money can be invested in stocks, real estate, or commodities. Mutual funds offer an easy way to start investing. With just one fund, you invest in a range of assets and are thus broadly positioned.
- Bonds are loans that are usually characterized by fixed-interest payments. They are issued by governments and companies, which use them to raise money on the capital markets. Anyone who buys a bond, therefore, gives the issuer a loan. The spectrum of bonds is very broad, there are very safe versions, but also highly risky ones. You can buy bonds individually or in the form of mutual funds.
Bonds and mutual funds are usually considered more safe investments that can bring a good profit in the long term.
Conclusion
The types of stocks listed here are the most important ones you need to know. It doesn’t hurt to include these terms in your stock market lexicon, they will definitely help you navigate the financial jungle a little better.