When it comes to growing wealth and achieving financial freedom, stock trading is an effective strategy that has worked for many investors.
- Provide you with a consistent source of passive income
- Enable you to protect your wealth from inflationary pressures
- Offer you an investment option with high liquidity
- Allow you to extensively diversify your portfolio
- Offer you with a highly flexible and affordable investment option i.e, fractional shares
- Enable you to earn higher returns on your principal as compared to other investment options
As a result, the merits listed above are highly attractive for any investor who wishes to achieve financial freedom. However, there are certain prerequisites for one to reap big from trading stocks and one of them is choosing the right type of stocks to invest in.
Like any other investment, there are stocks which are highly profitable while others are not. Different types of stocks also suit different investment goals. For instance, an investor who hopes to reap fast gains may tolerate high-risk stocks in volatile markets.
On the other hand, an investor with long-term wealth objectives may tolerate relatively lower returns for stocks in established companies with consistently good performance. Therefore, the best type of stocks to invest in may vary according to your personal investment goals.
However, the following is a general guideline of the right types of stocks to invest in:
Stock values and price projections are valuable metrics when it comes to finding the best types of stocks to invest in. However, one consideration that is becoming increasingly important is how fundamentally strong the stock of a company is.
For a company to be considered fundamentally strong, it must have good return on assets (ROA) and strong capital cash flows to finance its operations and raise revenue. It must also have low debt-to-equity ratio and its capital management practices must be very sound.
Such strong fundamentals ensure that a company’s performance doesn’t nosedive during economic downturns. Hence, when choosing the right types of stocks to invest in, always go for stocks in companies with strong fundamentals.
A company’s fundamentals including its growth potential, assets, liabilities, and profitability can offer you an insightful perspective into whether it’s a suitable type of stock to invest in. However, a comparison of the company’s stock performance with other companies in the same industry can equally be helpful in establishing the suitability of investing in its stocks.
This is because you can get a clear picture of the ideal growth rate, market capitalization, and resilience during economic downturns within the industry. You can then compare these factors with the actual credentials of a company and establish if it is the best type of stock to invest in both in the short-term and in the long-term.
Decision-making in the stock market heavily relies on numerical indicators. However, there are other vital indicators of the present and future stock performance of a company. One such factor is the quality of leadership.
If a company is led by visionaries, it will have great growth potential due to high levels of innovation in its product and processes. On the other hand, if the leadership is conservative, the company might have a very low growth ceiling and lower prospects of long-term prosperity.
The quality of leadership also determines the financial and employee management of the company—both vital determinants of a company’s stocks performance. Therefore, quality of leadership is a prime consideration when choosing the right types of stocks to invest in.
It is important to note that investment goals vary from one investor to another. It is these investment goals that determine risk tolerance as well as the time horizon of each investor. As such, it is vital to align the stocks you invest in with your short-term and long-term financial goals.
The aforementioned stock types are based on general criteria that is suitable for all investors. Based on your individual preferences, you can choose between various stock categorizations including:
§ Common and preferred stocks
§ Growth and value stocks
§ Domestic and international stocks
§ Dividend and non-dividend stocks
§ Large, mid, and small-cap stocks
§ Cyclical and non-cyclical stocks
§ ESG stocks
§ IPO stocks
As shown by the various types of stocks listed above, there is no shortage of the best types of stocks to invest in. So, if you are an ambitious investor, choose Alinea Invest today for and start trading stocks today! On Alinea Invest, you will enjoy zero commission, investing playlists, and social investing all on one fast and efficient stock trading platform!
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