What You Need To Know About Blue Chip Stocks, Penny Stocks, and ETFs

 Benson Guo

March 11, 2016

So now that you have set up an account with a broker, what stocks can you invest in with your money?

When purchasing stocks, you have two options—common and preferred. Most of a company’s shares are offered as common shares. As an owner of common shares, you are entitled to voting rights regarding company decisions and the right to maintain your proportional ownership of the company. An example of the latter case is when a company offers new stock; you have the right to purchase shares to maintain your portion of the company.

In contrast, preferred stock only represents a partial ownership of a company. It does not give you the right to vote on company matters. However, preferred stock shareholders receive dividends before common stock shareholders, and are paid off during bankruptcy first as well. There are four specific types of preferred stock, namely, cumulative, non-cumulative, participating, and convertible. Cumulative preferred stock gives owners the right to be paid dividends missed during tough financial times. Non-cumulative shareholders don’t have this privilege. Participating preferred stock return a larger profit than the usual dividend if the company turns a large profit. Finally, convertible preferred stocks can be turned into common stocks.

Stocks are also divided on measures like financials and risk. Some popular ones are outlined below.

Blue Chip Stocks

Blue chip stocks refer to profitable companies that have been established for quite some time. Because these companies have a solid financial record and balance sheet, they offer a low-risk way to invest. Often these companies pay dividends as well.

Penny Stocks

As the name suggests, penny stocks are cheap stocks priced at less than 5 dollars. These usually are represented by companies that are starting up or are recovering from a downturn. Consequently, penny stocks offer a very high reward that comes with a big risk. Penny stocks are often illiquid, meaning they are not bought and sold as frequently as regular stocks, resulting in orders taking longer to be filled.

Exchange Traded Funds

Referred to as ETF’s, these are securities that offer a diversified opportunity to invest in various assets, including commodities, currencies, and indices. An ETF is like a portfolio that produces similar returns to the asset being tracked. ETF’s trade like a regular stock on a stock exchange as they can be bought and sold. It is advantageous to invest in ETFs because they require low financial commitment (you can just buy one share), are tax efficient, and risk is spread apart in all the assets owned by the ETF.

Whether you want a stable stock that pays dividends or a volatile stock with high growth potential, there are stocks that fit everyone’s investing needs on the stock market. However, it is important to understand that there is no stock that will give risk-free returns and due diligence, or research, should be done before making any investment.