Back To The Basics

With the stock market volatility we are seeing lately, those of us at Tiger-Wolf Capital thought it was a good time to take a step back and create a “back to the basics” refresher. For those of you who are new to trading stocks, think of this as a quick crash course through some basic stock terminology you will find as you go through your own trading journey. While for those of you with more experience, it is never a bad idea to take some time to brush up on the basics. So whether you consider yourself a bear or a bull, at TWC we like to see both sides. 

To keep it simple, let’s start off at the beginning by answering a few  questions we all should know before trading any real money in the market.

  •  “What is a stock?” 
  • “What is an ETF?”
  • “What is the difference?”

“What is a stock”

Stocks (also known as equities) are a type of security that represent  

partial ownership of a business. This ownership entitles the stockholder  to a portion of the corporation’s assets and profits equal to how many  shares they own.

“What is an ETF”

ETF stands for Exchange Traded Fund, they are listed on exchanges and traded throughout the day just like regular stock. For those of you who use apps like Acorns for hands off investing, they use a collection of ETFs for their portfolio options. ETFs act as a basket of different securities including bonds, stocks, commodities, and  treasuries, that track an index such as SPY.

“What is the difference?” 

Simply put, stocks represent partial ownership of a company while an ETF represents a collection of different stocks and securities in a particular sector of the market. Stocks allow you to invest in 1 particular company that you want to trade, while ETFs can give you exposure to multiple if you believe that sector is primed for growth. 

 

With the basic definitions out of the way, I want us to look deeper at the different classifications of stocks we will see as we trade. Whether your preference is options, futures or accumulating shares it is important to know what kind of stocks you are looking at or for.

  • Common vs preferred stocks
  • Value Stocks
  • Dividend stocks 
  • Defensive stocks      
  •  Penny stocks 
  • Blue-chip stocks 

 

Common vs Preferred Stock

When looking to buy a companies shares, its important to note which variety are being offered for purchase and what each type will offer you as a shareholder. With “Common” stock purchases, investors receive voting rights in the company and represent a portion of ownership. Although in the event the company goes under, shareholders are the last to be paid after liquidation.

With “preferred” stocks,  when purchasing, investors do NOT receive voting rights as they would with common stocks. Although you do generally receive a guaranteed dividend from the company and in contrast with common stocks, If company is forced to liquidate, investors  get paid first.

Value stocks

A value stock refers to a company that appears to trade at a lower price than its  potential future value. Future value is based on the company’s fundamentals, such as  dividends, earnings, earnings per share, or sales, making it appealing to value investors. These can include companies such as. 

  • McCormick ($MKC)
  • Procter & Gamble ($PG)
  • Johnson & Johnson ($JNJ)
  •  CVS Health Corp. ($CVS)

Dividend Stock

Dividend stocks, also known as income stocks, pay regular dividends to their shareholders. Dividends are a sum of money paid regularly (typically quarterly) by a  company to its shareholders out of its profits (or reserves).

Defensive Stock

Now with the state of the market currently, many of you may be interested in this classification of stocks for your portfolios. A defensive stock is a stock that provides consistent dividends and stable earnings  regardless of the state of the overall stock market. Demand is stable for these products  so the need doesn’t vary. (Not to be confused with defense stocks or companies that  manufacture weapons.) Companies that can be considered defensive include

  • Procter & Gamble ($PG)
  • Johnson & Johnson ($JNJ)
  • Philip Morris International ($PM)
  •  Coca-Cola ($KO)

 

Penny stocks

For those of us that prefer stocks with a low cost of entry and high-risk tolerance, these may be your cup of trading tea. A penny stock typically refers to the stock of a small company that trades for less than $5 per share. Some penny stocks trade on large exchanges such as the New  York Stock Exchange (NYSE), however, most trade via over-the-counter (OTC)  transactions through the electronic OTC Bulletin Board (OTCBB)

The caveat with Penny stocks, although there can be substantial gains in trading penny stocks,  there is also equal risks of losing a large investment in a short time. So its important to understand your risk tolerance here before taking the plunge into penny stocks.

Full disclaimer, for those that know us at TWC we love to trade tesla, it may move like a penny stock during volatile times but it has the market share of a blue-chip stock. So when it comes to Tesla it usually is in a class of its own.

Blue Chip stocks

 

The bread and butter of some traders, A blue-chip stock is a huge company with an excellent reputation. These are typically large, well-established and financially sound companies that have operated for many years. With normally  dependable earnings, they often pay dividends to investors. The size and market share these companies have, often make them attractive “safer” options for investors. Although at Tiger-Wolf we will always encourage portfolio diversification, never putting all your eggs in 1 basket is important for longevity in trading.

Examples of Blue-Chip Stocks:

  •  IBM Corp. ($IBM)
  • Coca-Cola ($KO)
  •  Boeing  ($BA) (pre-pandemic)

For those of you just getting into trading securities, I hope this quick crash course in stock basics helps outline some key differences in the variety of options available to traders. It can feel overwhelming when you first take the plunge from watching on the sidelines to actively trading. Especially when the market seems to be more volatile each day, but at Tiger-Wolf Capital we strive to simplify the process for everyone. Whether it is through our investing reports, client services or trading bootcamps, we can be your 1 stop shop to help guide you through the market. 

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