Many people understand stocks in a general sense but need help getting started in investing. That’s understandable since much of your success as a stock investor depends on your knowledge of the stock market and your identification of high-reward options, two skills that you develop primarily with experience. With that in mind, we’ve created this guide to acclimate you to the world of stocks and help you explore new opportunities with stock investing.
Key Takeaways
- When you own stocks that increase in value, every share represents a potential profit when sold.
- There’s a broad array of stock types to choose from, each with a different level of risk and reward.
- Stocks in health care, consumer staples, information technology, and artificial intelligence may be primed to excel due to continuing or growing consumer reliance on these industries.
- To build a healthy stock portfolio, begin by defining your goals, buying a diverse range of stocks, and keeping up with market news.
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What Is Stock Investing?
Stock investing is the practice of buying ownership shares in a publicly traded company. Investors usually buy shares in multiple companies, with each stock becoming a part of a portfolio. Investors expect that their stocks will increase in value over time so they can sell for a profit, resulting in passive income.
For example, if you bought 20 shares at $10 each in 2010, and by 2023 the stock value has increased to $100 apiece, your $200 investment has grown to $2,000. By selling your shares, you would profit by $1,800. Now imagine you have a large portfolio of stocks with similar profit margins, and you can begin to see how stock investing can exponentially grow your wealth.
Types of Stock
Not all stocks are the same, and understanding their differences can help you build a stronger portfolio. Here are some of the stock terms you’re likely to encounter on your investing journey:
Common Stock
Common stocks are one of the two primary stock types. Also known as ordinary shares, they give shareholders the right to vote on a company’s direction. Often, they also provide dividends, which are regular disbursements of a company’s profits.
Preferred Stock
Along with common stock, many companies also offer preferred stock, the other primary type. Preferred shareholders normally don’t have voting rights, but they are entitled to dividend distributions before common shareholders and are among the first to receive compensation in the event of company bankruptcy or dissolution.
Growth Stock
Growth stock pertains to companies that are forecast for growth and high returns. Growth stocks tend to do well when interest rates are lower, and the economy is on an uptick, but there are a couple of concerns associated with them. One is a potential lack of dividends, as the company is putting its money toward growing instead of paying investors. Another concern is overvaluation, as your actual earnings may fall short of your expectations.
Value Stock
If growth stocks are highly rated, then value stocks are underrated. They trade at comparably low prices but still have the potential to gain significant value, particularly during an economic recovery.
Penny Stock
Penny stocks are shares in small companies, usually selling for under $5 each. Some penny stocks are available through large, centralized exchanges such as the New York Stock Exchange, but most of them trade directly between two parties via a broker-dealer network. Penny stocks may potentially offer higher-than-average returns, but they are typically high-risk, and there are concerns about scams on the penny stock market.
Small-, Mid-, and Large-Cap Stock
“Small cap,” “mid-cap,” and “large cap” refer to a company’s market capitalization, which is the total value of its outstanding stock shares. Small-cap stock is for a company with a market capitalization under $2 billion, mid-cap stock is for market capitalizations between $2 billion and $10 billion, and large-cap stock is for capitalizations of $10 billion or more. Generally, a company’s stability increases with cap size.
Blue-Chip Stock
Blue chips are a type of large-cap stock, specifically for well-established companies with reputations for profitability. Including blue-chip stocks in your portfolio can help mitigate risk during market uncertainty.
Income Stock
Income stocks are relatively low-risk investments providing shareholders with steady and increasing dividends, even under modest share-price appreciation. Their low volatility and high reliability are their chief selling points.
Defensive Stock
Defensive stocks tend to provide consistent dividends and returns in most economic conditions, even downturns, as the companies providing them typically offer essential goods or services. Their reliability helps to level out the risk in your portfolio.
International Stock
International stocks are for companies based overseas. They can be valuable additions to your portfolio because foreign markets may rise and fall at different times than the U.S. market, helping to normalize your investments’ overall volatility.
4 Stock Investing Opportunities To Consider
If you’re a new investor, you may be looking for tips on where to spend your money. One of the keys to high-reward stock investing is to identify in-demand sectors and the major players within them, particularly up-and-coming stocks that fill market niches. With that in mind, you may consider buying shares in the following industries:
Health Care
Investors consider health care stocks to be defensive because people continue to see doctors and take medications regardless of economic conditions. Also, because growing numbers of Americans are on government-sponsored plans, health care spending is now less dependent on the state of the economy. One class of health care stocks worth following is telehealth, which increased in popularity during the COVID-19 pandemic and continues to account for many outpatient visits.
Consumer Staples
Consumer staples, including everyday necessities such as food, beverages, hygiene products, and household goods, is another sector offering defensive stocks. Some investment experts recommend seeking stocks in companies with access to emerging markets, which are more likely to perform well due to increased middle-class spending. A risk factor to consider is the impact of inflation on consumer staples. As the past few years have seen significant price rises in this sector, you may want to focus on companies that practice stricter price control to avoid losing consumers to inflation fatigue.
Information Technology
Though the past few years have been tough for the IT sector, trends among tech users, the continuing demand for tech services and the development of new advances may suggest an impending upturn. Companies across nearly every industry are trying to improve operational efficiency, innovation potential, and consumer engagement, and IT is the key to these achievements. Namely, more and more organizations are shifting from on-site IT architectures to cloud-based computing, as well as looking to leverage 5G bandwidth.
Artificial Intelligence
Though technically a subset of information technology, AI is worth exploring as its own field because it’s such a popular topic among investors, especially with the ongoing development of tools such as ChatGPT.
If you’re interested in adding AI stocks to your portfolio, gauge the return potential of a company’s stock by examining how it’s using the technology. In general, focus on well-performing organizations leveraging AI for operational or strategic improvement rather than low performers suddenly touting AI products. Also, given the rising popularity of AI across industries, consider looking into companies manufacturing the chips needed to fuel the technology.
Tips for Picking Stocks
Stock investing is an art, not a science, and the market provides multiple paths to success. Consider these tips for picking stocks to help you find the path that works best for you:
- Know yourself and your goals: Are you risk-averse or risk-seeking? Do you want to realize quick returns or play the market more patiently? Determining these factors can help you decide which stock types are appropriate for your portfolio.
- Diversify: A diversified portfolio contains a variety of stocks with different risk and reward levels. The idea behind diversification is that the upside of some of your stocks should be able to cover the downside of others. Aim to build a portfolio with a broad range of stock types, including a healthy mix of safe picks and riskier, higher-reward options.
- Stay current: You’ll have difficulty finding high-reward stocks if you don’t follow market news. Keep up with economic trends and activities to more accurately gauge the potential of up-and-coming stocks and identify those likely to net handsome profits.
Grow Your Wealth by Growing Your Knowledge
We’ve only just opened the door to the world of stocks. If you’d like to explore more investing nuances, Infinity Investing is happy to guide you. Consider signing up for our 360 Pro membership to access valuable tools and resources for refining your investing strategy. You’ll learn how to leverage stocks and how assets, such as real estate, can help you realize long-term financial freedom. All you need are the right resources, some learning, and the continuing application of your knowledge to achieve your financial goals. We look forward to helping you get there.
Infinity Investing Featured Event
In this FREE event you’ll discover how the top 1% use little-known “compounders” to grow & protect their reserves. Our Infinity team of experts show you how to be the best possible steward of your finances and how to make your money and investments work for you instead of you working for them. Regardless of your financial situation today, you’ll have a road map to get to where you want to be.