Types Of Stocks: What You Need To KnowLAST UPDATED: April 11, 2023 | By Conrad Golly
Do you feel like the stock market is too complex to understand?
If so, you’re not alone. Many people find it intimidating to sell stocks, but I’m here to tell you that investing in stocks doesn’t have to be a mystery. By familiarizing yourself with the different types of stocks, you’ll be well on your way to making better financial choices.
Understanding the various types of stocks is essential for any investor, regardless of experience level.
This article will provide a comprehensive guide to each type of stock available on the market today, so you don’t have to feel overwhelmed by all the financial jargon.
You’ll learn about the differences between them, their advantages and disadvantages, and which ones might be best suited to your investment goals.
Main Street Break Down
- Two major types of stocks are common stock and preferred stock. Common stock usually has voting rights.
- All Stocks Have Risk.
- Stocks can also be classified by sector, location, company size or investor style.
- Some stocks pay a periodical dividend and some you can take gains or loses only when you sell.
Table of Contents
What Are Stocks?
Stocks, also known as equities, represent a portion of ownership in a company. When you buy shares of stock, you become a partial owner of that business.
Investors purchase stocks hoping to make money through future growth or from dividend payments made by the company.
Investors commonly regard “stock” as synonymous with common stock, which affords shareholders voting rights as board members and offers profit-sharing based on a corporation’s performance.
However, preferred stocks provide an alternate option for those aiming to acquire higher dividends without the privilege of conferring votes; even if bankruptcy liquidation is imminent, it takes precedence for preferred stock over common stock.
The cost of each stock is based on the current supply and demand, which can be drastically impacted by news events such as earnings reports or changes in market capitalization.
Your investment’s worth will fluctuate depending on these elements, so you need to stay up-to-date with your investments.
Integrating Stocks Into Your Investment Portfolio
When you’re ready to expand your investment portfolio, there are different kinds of stocks available – common stocks, dividend stocks, and preferred stocks.
Each one carries its associated levels of risk and reward so you must comprehend the varying market caps connected with each type and how they can contribute to your long-term financial goals.
Dividend stocks are a great way to accumulate long-term capital appreciation in addition to receiving regular income distributions.
Preferred stocks often feature higher yields than common stock but contain some limitations regarding voting privileges and dividends.
If you’re seeking diversification across multiple asset classes, investing in mutual funds can yield both dividend and non-dividend-paying securities.
Before investing in any stock, it’s critical to conduct your research.
Familiarize yourself with the associated risks of each security and make sure it is compatible with the objectives of your entire investment portfolio.
To ensure you remain on track towards meeting those goals, check in regularly and adjust as needed if necessary.
|Stock Market Sectors||Types of Companies|
|Communication Services||Telephone, internet, media, and entertainment companies|
|Consumer Discretionary||Retailers, automakers, and hotel and restaurant companies|
|Consumer Staples||Food, beverage, tobacco, and household and personal products companies|
|Energy||Oil and gas exploration and production companies, pipeline providers, and gas station operators|
|Financial||Banks, mortgage finance specialists, and insurance and brokerage companies|
|Healthcare||Health insurers, drug and biotech companies, and medical device makers|
|Industrial||Airline, aerospace and defense, construction, logistics, machinery, and railroad companies|
|Materials||Mining, forest products, construction materials, packaging, and chemical companies|
|Real Estate||Real estate investment trusts and real estate management and development companies|
|Technology||Hardware, software, semiconductor, communications equipment, and IT services companies|
|Utilities||Electric, natural gas, water, renewable energy, and multi-product utility companies|
Common Stock and Preferred Stock
In the realm of investing, common stock represents a golden ticket to the kingdom of a company, granting you ownership and a voice in its affairs.
As a holder of this key, you may be bestowed with the gift of dividends, although the generosity of this offering is never set in stone.
These securities come in different shapes and sizes depending on the size of the company they represent; some will offer greater stability while others might provide greater upside potential but will also require a higher risk tolerance level.
Picture this – no voting rights and no claim on assets, but a VIP pass to the front of the fixed dividend line, with guaranteed payouts before common stockholders even get a sniff of fixed dividends.
That’s the life of a preferred stock investor!
Convertible preferred stock is a type of investment that allows owners to switch their holdings into a predetermined number of their common stock shares at some point in the future.
For example, if each conversion right provides an investor with the ability to exchange one share of preferred stock for five shares of its corresponding common stock, then they’ll be able to do just that when the specified date arrives.
When investing in preferred stocks, you have the potential to receive cumulative dividends and conversion rights. Not only that but certain other privileges such as liquidity preference may also be granted.
Similar to any security investment, there is still a risk factor associated because it depends on how efficiently management runs operations and whether their strategic plans will benefit both them and shareholders alike.
Small-cap stocks are a great way to invest in the market.
These stocks, also known as small-market capitalization (or “market cap”) stocks, are usually valued at less than $1 billion.
They’re attractive investments because of their potential for high returns.
Penny stocks, which trade on over-the-counter exchanges and don’t have the same level of regulatory oversight as larger companies listed on the New York Stock Exchange or Nasdaq, often fall into this category.
Investors who want to get involved with small-cap stocks should understand that these can be risky ventures; they may not have made an initial public offering yet and some lack liquidity.
But if you do your research properly and make sure the company is financially sound, investing in one of these could prove lucrative.
These investments aren’t just reserved for large institutional investors either: individual traders now have more access than ever before thanks to online trading platforms and brokerage services like M1 Finance, Robinhood, and E*Trade.
If you’re aiming to make a profit from the stock market, mid-cap stocks might be perfect for your needs.
Defined by their capitalization range of being between the small-cap, market average and large-cap stocks (1-10 Billion), these investments boast greater liquidity than small caps with fewer risks than larger ones – providing the best of both worlds!
With mid-caps, investors can enjoy more stable returns while still having potentially higher growth prospects compared to other options.
Mid-cap stocks can provide both preferred stockholders and common stock dividends. Preferred shareholders receive priority in payments if a company goes bankrupt, while common stockholders typically only receive any remaining funds after other creditors’ claims are satisfied.
Common stock and preferred shareholders also stand to gain when a company performs well since they will usually see returns via dividend payouts or share price increases.
Investors should always do their due diligence before investing in any type of security, including mid-caps.
Researching current market conditions along with a company’s fundamentals is key to making wise decisions that can potentially result in attractive returns over time.
Large-cap stocks are those of companies with market capitalizations greater than $10 billion.
They are among the most liquid and widely held securities in the stock markets, making them attractive to investors who seek stability and liquidity.
As a result, large-cap stocks typically exhibit lower volatility than small-cap or mid-cap stocks.
Within the large-cap category, there are two main types of stocks: value stocks and growth stocks.
Value stocks generally have low price/earnings ratios relative to their industry peers, whereas growth stocks tend to trade at higher multiples due to expectations for future earnings increases.
Examples of well-known large-cap value stocks include blue-chip names like Microsoft, Apple, Amazon, JPMorgan Chase & Co., and Johnson & Johnson; while high-profile growth stocks such as Google parent Alphabet Inc., Facebook Inc., Zoom Video Communications Inc., and Tesla Inc. come from the technology sector.
Investors seeking sustained and profitable gains should take a closer look at large-cap equities, which offer the possibility of strong returns over extended time horizons when correctly managed.
To make an informed decision, investors are encouraged to research each company’s fundamentals thoroughly as well as its past performance and against other stock prices in its respective industry sector.
Risk management strategies must also be factored into your investment plan for maximum success.
Domestic Stock And International Stocks
Domestic stock refers to the stocks of companies that are based and operate within a single country.
These securities may be traded on one or more domestic stock exchanges like NASDAQ in the United States, FTSE 100 in the UK, NIKKEI 225 in Japan, etc.
In comparison to domestic stocks, international stocks offer a different set of opportunities and risks for investors.
Despite the potential rewards, many have yet to take advantage of this type of investment. Only 10% of all American households invest in international stocks or exchange-traded funds (ETFs).
International stocks often come with higher risk than those found on major exchanges like the NYSE or NASDAQ.
Penny stocks are one example that can be volatile due to a lack of liquidity or limited information available about the company.
However, they also hold great potential if purchased at the right time and price point. Thus, it’s important to do extensive research before investing in any stock outside your home country.
By including international investments in your portfolio, you can diversify and potentially increase returns in the long run.
Spreading out risk is essential to prevent any single investment from taking up a majority of your total assets.
As the access to foreign markets through online brokers and ETFs are now more available than ever before, this is an opportune time to think about incorporating global investments into your financial strategy.
Growth stocks come in many forms, but the most common are tech stocks.
These companies often have a strong technology or innovation focus and tend to be more volatile than their counterparts.
They also offer investors the potential for future growth due to their ability to rapidly evolve with changing markets.
Common stock owners of these types of companies benefit from any profits that the company makes as its stock market capitalization increases over time.
This can provide a great opportunity for those looking to make long-term investments in an ever-changing business climate.
The key factor when considering investing in growth stocks is understanding the risks associated with them. While they may offer higher returns compared to other sectors, there is always the potential for loss if things don’t go according to plan.
As such, it’s important to evaluate each investment carefully before making any decisions.
Let’s move on to another type of stock: value stocks.
Value stocks are typically older, well-established companies that have a good track record in the past and may not be growing as much as newer businesses.
They often pay dividends which provide investors with a regular income stream from their investments.
Investors who purchase these types of stocks also get voting rights when it comes to decisions about the company’s stock.
When chosen with prudence, value stocks are an ideal way to enjoy steady growth potential and regular cash flow from dividends or other payment options.
You may not witness substantial returns instantly; however, if you select them cautiously these investments could potentially generate positive outcomes over a long period given their stability and high success rate for the long haul.
With vigilant analysis and cost comparison analysis, you can benefit greatly in years to come via investing in value stocks.
Have you ever heard of IPO stocks? They are a type of stock that can be very lucrative if done right. But what exactly is an IPO stock and how do they work?
IPO stands for Initial Public Offering, which refers to when a company makes its shares available for purchase by the public.
This allows companies to raise money to grow or expand their business. When buying IPO stocks, it’s important to understand the risks involved as well as the potential rewards.
Many small-cap companies choose IPOs to generate funds quickly. By offering shares in the company, investors have the chance to make money from potentially rising share prices.
There is also a great deal of risk associated with investing in these types of stocks because there may not always be enough buyers who will pay higher stock prices rather than those offered initially.
Since these stocks don’t have any history yet, it’s difficult to predict whether they’ll succeed or fail in the future.
Aspiring to invest in an IPO stock? Be sure to conduct extensive research first.
It can often be perceived that only experienced traders should partake in this type of trading, but the truth is it’s advantageous for anyone who takes time researching and gaining insight into IPOs before committing.
Fortunately, there are many online resources where you can find useful information about them and determine if investing makes sense for your portfolio.
Dividend Stocks And Non-Dividend Stocks
Dividend stocks are a great way to increase your portfolio’s profitability.
These stocks allow you to receive dividend payments, which can help supplement income in retirement or provide additional funds for investments.
Some companies give a part of their earnings to their shareholders as dividends. These dividends can provide an extra source of income for investors and make those stocks very attractive to certain investors.
Even paying as little as $0.01 per share can qualify a company as a dividend stock.
But not all stocks pay dividends. Some companies may choose to reinvest their profits back into the business rather than give a portion to shareholders.
This doesn’t mean they aren’t good investments, though. Some of the most successful companies in the world don’t pay dividends.
However, in recent years, more and more companies have been paying dividends to their shareholders.
Non-dividend stocks are a type of stock that investors may want to consider when determining which types of investments to make.
These stocks offer little in terms of immediate income but have the potential for significant capital gains over time.
Non-dividend stocks come from many different categories, including small-cap markets and mutual funds, as well as non-cyclical and speculative investments.
Investing in stocks carries with it substantial rewards and risks alike.
With the potential to realize massive returns from your investments, there is also a chance of enduring hefty losses and lose the investment, should things not pan out as expected.
Therefore, conducting thorough research into companies’ finances before investing is a must for any investor looking for long-term success.
Additionally, certain businesses may require special regulatory approval before you can purchase shares in them – an important factor to consider when deciding on where best to invest your hard-earned money!
Income stocks pay dividends to their shareholders based on the company’s earnings in the prior quarter or year.
These dividends provide investors with a steady stream of income and capital gains. They tend to be relatively stable even during periods of market volatility.
When looking for income stocks, research and understand each company’s operation, sector, and management team.
Consider historical dividend payment information to predict future returns.
While investing in income stocks can be beneficial for those who want consistent exposure to the stock markets, these investments still carry risks.
It is crucial to consult with an experienced financial professional before making any investment decisions.
Cynical Stocks And Non-Cyclical Stocks
Cyclical stocks are a type of stock that tends to perform well during times of economic expansion, but poorly during economic downturns.
These stocks are also known as “pro-cyclical” stocks because their performance is closely tied to the overall business cycle.
Industries that are highly sensitive to changes in the economy, such as automotive, housing, and construction, are often associated with cyclical stocks.
For instance, companies that produce cars or consumer goods are more likely to experience increased sales during periods of economic growth but decreased sales during economic contraction.
Investing in cyclical stocks can be risky due to their high volatility and unpredictable performance. However, these stocks can also offer high returns during periods of economic growth.
Diversifying your portfolio by investing in a variety different types of stocks from across different industries and sectors can help manage the risks associated with cyclical stocks.
Another strategy is to focus on companies that have a strong balance sheet and cash reserves, as they may be better equipped to weather economic downturns than highly leveraged companies.
Non-cyclical or defensive stocks perform well in any business cycle compared to cyclical stocks which are highly sensitive to economic fluctuations.
Examples of non-cyclical or defensive stocks include companies in essential industries such as healthcare, utilities, and consumer staples.
Investing in non-cyclical stocks offers stable long-term returns and reliable dividends, making them attractive to income-seeking investors.
They may not provide as much growth as cyclical stocks during an economic slowdown or expansion, and they may not be well-positioned to take advantage of new market opportunities.
One strategy is to invest in companies with strong fundamentals and consistent earnings growth, while another is to diversify the portfolio to include a mix of both cyclical and non-cyclical stocks to reduce overall risk.
Safe stocks are a type of stock that is considered to be relatively low-risk compared to other types of stocks.
These stocks are often associated with companies that have a long history of stable earnings and revenue growth and are considered to be less sensitive to changes in the economy.
Investors who are interested in investing in safe stocks should be aware of the potential trade-offs. While safe stocks may be less risky than other types of stocks, they may also offer lower potential returns.
Additionally, some safe stocks may be more expensive than other types of stocks, as investors are willing to pay a premium for the stability and predictability of these stocks.
One strategy for investing in safe stocks is to diversify your portfolio. By investing in a variety of safe stocks across different industries and sectors, you can reduce your exposure to any one specific type of stock.
You may want to consider investing in safe stocks as part of a broader investment strategy that includes other types of stocks and investment vehicles, such as bonds and mutual funds.
ESG investing is a philosophy that considers environmental, social, and governance factors alongside traditional financial metrics.
While traditional investing focuses on profit and revenue growth, ESG principles take into account the broader impact a company has on the environment, its employees, customers, and shareholders.
Socially responsible investing, or SRI, is often associated with ESG investing. SRI involves screening out stocks of companies that don’t align with an investor’s values.
In contrast, ESG investing encourages investors to actively seek out companies that are leaders in ESG practices.
Investing in companies with a clear commitment to ESG principles has been shown to potentially improve investment returns. As a result, there is growing interested in ESG investing among investors who prioritize sustainability and responsible investing.
Blue Chip Stocks
Blue chip stocks are shares of well-established, financially stable companies with a long track record of consistent performance.
These stocks are generally considered to be less volatile than other types of stocks and are often associated with industries such as technology, finance, and energy.
Blue chip stocks are typically well-known companies with their ability to generate steady income and growth over time, making them an attractive investment option for those seeking stability and predictability.
Due to their established reputation, blue chip stocks are often sought after by institutional investors and individuals alike.
Penny stocks are low-priced, highly speculative stocks that are associated with small companies. They are typically traded over the counter and have a market capitalization of less than $300 million.
Due to their low price and high volatility, penny stocks are often considered to be high-risk investments.
However, some investors are attracted to penny stocks due to their potential for high returns. It’s important to note that penny stocks should be approached with caution, as they are often subject to fraud and manipulation.
Additionally, the low liquidity of penny stocks can make it difficult to sell them at a desired price.