Common Stocks - The Force Of The Stock Market
Everyone remembers Star Wars; Luke Skywalker, R2D2, James Earl Jones' voice for Darth Vader. The movie is a good vs. evil conflict with a spiritual power helping the good side; this power was called “the force”. When leaving, the saying “the force be with you” was frequently uttered. There is a “force” in the stock market; common stocks as they are called represent the power of the entire market and the best investment assets available to the average investor.
Types of Stocks
Generally speaking, there are two types of stocks, preferred and common. While preferred stocks sound better or more important, the difference isn’t necessarily positive.
Preferred Stocks – This form of shares offers some limited benefits to its holders. Holders of preferred stocks usually receive dividends; dividends are paid as a form of returning a portion of the company’s profits to the shareholders. Preferred stocks tend to be slow, stable investments that likely won’t net the holder great sums of many but will likely be a steady performer in a stock portfolio.
While preferred stocks have the dividend benefit, there are a number of drawbacks as well. Dividends can be subject to a 15% dividend tax. As many companies have attempted to reduce operating costs, reductions in dividends has been a focus of attention. Since preferred stocks pay dividends, their rate of return is usually lower than common stocks. Because of these drawbacks, preferred stocks have lost some of their luster as a long term investing vehicle.
Common Stocks – As the name implies, common stocks are the typical investment asset in any company. While they don’t possess dividend rights or voting privileges, common stocks make up for it with profit potential. The fortunes that are made, and lost, in the stock market are usually made on the backs of common stocks. These shares see the biggest ups and downs in the market and Wall Street news is filled with stories and advice on how to trade them. Google stock, that IPO’ed at $85, soared to over $500 and WorldCom, that went from the heights of the stock market to a penny stock in less than 2 years, are examples of common stock. Because of the inherent stock volatility of common stocks, they are truly the “force” of the stock market.
Investing in Common Stocks
Common stock should be a strong component of everyone's portfolio diversification. Once you have identified in your stock trading plan exactly how you want to earn money you will be able to determine the role of common stocks. Are you in your 20's and want to earn aggressively, accepting the higher risk? If so, common stocks will play a huge part of your portfolio. Are you in your 40's looking to develop your long-term investing? Stocks will provide the value building but you should also include more high quality bonds and high-paying money market accounts. Are you in your 60's and near retirement? You will likely have less speculative common stocks and more large cap stocks that provide income as well as stability.
In each of these cases, the investment philosophy uses common stocks for the income generation. Because of their great potential common stocks should be a part of every investment portfolio. Like in the movie Star Wars, common stocks are “the force” that savvy investors can use to defeat the evil empire. Each investor should follow his or her trading plan and take advantage of the benefits of common stocks. May the “force” be with you!