People are often afraid to get involved in stocks because they think it’s risky. It is true that the price fluctuates a lot and it is also affected by a lot of factors aside from the actual performance of the company but there are certain stocks that are more riskier but gives higher return over the other stocks and vice versa. There are three general classifications of stocks, Blue-chip stocks, regular stocks and junk stocks. In other rating companies like Moody’s, regular stocks are broken down to ABCs similar to the school grades the students but for simplicity we will just call them regular stocks.
Blue-chip stocks are the safest type of stock in the market. Only stable companies with stable profits proven for years are called Blue-chip stocks. The top companies in your countries are typically the ones that have this level. These types of companies have regular profits but they are usually at its peak, they do not have much space to grow their business, in return market participants does not expect these companies to have much growth in their stock price too. Major corporate decisions or projects could improve the outlook on these companies. However, it is still good to have a Blue-chip stock not only because of its stability but these companies are the ones that usually release dividends due to its lasting performance.
Regular stocks are similar to Blue-chip stocks in a sense that they are quite stable but have not reached its peak. Compare to the other two, this type of stock is have the medium risk and medium return. Corporate news will affect the stock price of this type of stock because market participants watch the corporate actions closely.
Junk stocks are usually the riskiest yet give the highest return. These types of stocks fluctuate heavily which makes it a good choice for traders. Companies earn this type of rating if they are a totally new company or have a lot of unpaid debts. Rating companies think that this type of companies have a low capability of paying their debts. If any good news was released from these types of companies it would result to a huge jump in prices.
Each type of stock has its own pros and cons but with the right experience and knowledge it would not be difficult for you to pick which stock is the best. Typically, investors do not only focus in one type of stock but have a portion of each in their investment basket. By doing so, you would manage the risk and return of your portfolio.