Being a successful investor involves a lot of factors. Having a solid understanding of how investments work is is important, whether for day traders who are new to the market or investors planning for retirement decades away. One of the most basic stock concepts to grasp is an understanding of the various types of stocks that can be traded.
Penny stocks is the name commonly used to describe cheap stocks that are literally traded for a few cents per share, sometimes less. These stocks are usually traded OTC (over-the-counter, or directly between two parties) and are also referred to as pink sheets. Penny stock companies are typically small businesses that operate in a niche market. For example, a chain of gasoline filling stations in a particular city may be collectively held by a pink sheet company that the owners have invested in. Because of the low stock price, penny stocks are widely considered as a poor risk by institutional investors and are largely overlooked.
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Growth stocks are a class of companies that are new to the market. The companies have no known history or track record to base decisions on, so there is a lack of stability associated with investing in growth stocks, although they show great potential. Those who do buy shares in these companies stand to make exceptionally high profits when the companies succeed, but also have a higher than normal risk that the venture will fail and cause a loss of investment capital.
Secondary Issue Stocks
Companies that have an established trading history with a verifiable track record are referred to as secondary stocks. The advantage to buying shares in these companies is that you can look at the past performance of the company to determine if it has a reliable history. It also helps you determine how well the company fits into your overall trading strategy. Companies with slow growth will not fit into a high-risk strategy, just as companies with performance spikes will not fit well into a conservative strategy. Looking at the historical data that is available with secondary issue stocks will help you determine precisely how valuable a stock will be to your portfolio.
Blue Chip Stocks
The oldest and most reliable stocks on the market are referred to as blue chip investments. Companies such as IBM and AT&T are considered blue chip stocks. These companies have withstood the test of time, and have proven to generate profits more often than losses, making them a popular investment. The downside is that the size of the company and the popularity of its shares often drive up the prices of blue chip stocks, so they are not as affordable as other companies. However, what money can be put into these businesses is considered to be a wise investment.