Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.
This represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
Invest in approximately 20 to 30 stocks in at least six to eight sectors with different investment characteristics. No more than 20% of the total value of your stock portfolio should be in any one sector. No more than 10% of the total value of your stock portfolio should be in any one stock. You should invest a minimum of approximately 3% to 4% of the total value of your stock portfolio in each stock.
Deciding which stocks to invest in can be difficult, especially if you have a low tolerance for risk. That’s why it’s important to define one’s financial goals and how much risk can be tolerated. Research stocks that fit within your strategy and invest in stocks that have the potential to help you meet your specific goals, whether you want investment growth, income, or a combination of the two.