You’ve decided you want to be an investor and you’re ready to jump in…but how do you decide what type of companies and stocks you’re going to invest in?
You might hear or read news about good stock buys like Facebook, Tesla, or Amazon, but are these the right choices for you? How do you decide if the stock offer is a good price? The options are overwhelming when you begin. So let’s step back, get some perspective, and find out about the different types.
Here’s an overview to start learning about the categories of investments out there…
Growth stocks are high risk and high reward. Generally these are younger companies. Often they’re tech companies… think trendy and sexy. These are the stocks people talk about where if they get one right, they could be set for life. But they’re also really risky and can fall quickly.
These are stocks that have recently gone from private to public companies in the last one to three years. They’re usually driven by a lot of excitement, and people want to get an early buy the day the stock is offered. They can be a good investment if you truly know the company, but like growth stocks they can be pretty volatile.
Value companies are low risk and high reward.They’re well-established companies that have been around for at least ten years. One of their attributes is that they’ve proven over time that they can overcome events and challenges by surviving and then continuing to grow afterward.
Value stocks will be our biggest focus on the podcast, because they offer true value for you. They’ve got great financials, low debt, and proven cash flow. The challenge is that these companies don’t go on sale very often so you have to do your research and have patience. But if you do the work and are prepared when their price comes down temporarily because of an event, you can aggressively jump in and buy it before it goes back up.
So you really don’t end up having an opportunity to own a lot of these, but your research and learning will center on them. I always want at least 80% of my portfolio in value companies.
Aside from the categories above, there are a few other ways you can characterize companies…
One method is based on market capitalization… how large is the company, what is it worth? For example, large market cap companies are over $10 billion and are generally considered safer, mid cap range from $2 billion to $10 billion, and small usually have a market capitalization between $300 million and $2 billion.
Another way to categorize them is whether the company is domestic or international, but use caution here, as this can be pretty arbitrary because it’s really just based on where the company is headquartered. Being listed as domestic or international doesn’t say anything about where they actually operate or sell or where their customers are mainly located.
And probably the more important categorization is whether they pay dividends. Some companies pay their shareholders money on a regular basis, regardless of where their stock prices are. Basically this is a way to get passive income. These companies are sought after, but there are also tons of great companies that don’t do this and who will probably do better for you in the long term. So it’s another part of the decision-making system you’ll develop over time.
In future podcasts and articles we’ll talk about how to do your research, how to create a Watch List of companies, and how to decide when a stock is the right one at the right price for you.
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