When people think of stocks, they typically think of shares that are traded on the stock exchange and are open to the public. But it’s important for investors to know the different kinds of stocks that are available, understand how they are different, and know when they might be a good investment.
Throughout history, investing in the stock market has been one of the most important ways to get ahead financially. As you learn more about stocks, you’ll often hear them talked about in terms of different types of stocks and how they are grouped.
Below, we explain the different types of stocks so that investors don’t get confused by all the different options.
Common Stocks And Preferred Stocks
Common stock sometimes called “ordinary shares” is a part of a company’s ownership. This type of stock gives investors the right to profits, which are usually paid out as dividends. Common stockholders choose the board of directors and vote on the policies of a company.
In the event of a company’s liquidation, holders of this type of stock have the right to the company’s assets, but only after preferred stock shareholders and other debt holders have been paid. Common stock is usually given to the founders and employees of a company.
On the other hand, a person who owns preferred stock, also called preference shares, can get regular dividend payments before dividends are given to common shareholders. As was already said, preferred shareholders are also paid back first if the company goes out of business or files for bankruptcy. Preferred stock doesn’t give you the right to vote, and it’s good for investors who want a steady stream of passive income.
Cyclical And Non-Cyclical Stocks
National economies tend to grow and shrink in cycles, with times of prosperity and times of hardship. Some businesses are more affected by significant changes in the economy than others, so investors call them “cyclical stocks.”
Shares of companies in industries such as manufacturing, travel, and luxury goods are cyclical stocks, because when the economy is bad, people may not be able to make big purchases as quickly. When the economy is growing, on the other hand, a rush of demand can make these industries jump back up quickly.
Non-cyclical stocks, which are also called defensive or long-term stocks, don’t have these significant changes in demand. Grocery store chains are an example of a non-cyclical stock since people still have to eat no matter how bad or good the economy’s status is. Cyclical stocks tend to do better when the market is going up, while non-cyclical stocks tend to do better when the market is going down.
Value Stocks And Growth Stocks
Another way to group things shows the difference between two popular ways to invest. Growth investors usually look for businesses whose sales and profits are proliferating. Value investors invest in companies with shares that are cheap compared to their peers or to how much they used to cost.
Growth stocks usually have a higher level of risk, but the potential profits can be very good. Successful growth stocks have enterprises that meet a strong and growing need among customers. This is especially true if their products and services are supported by long-term societal trends.
But competition can be tough, and if competitors mess up a growth stock’s business, it can quickly fall out of favor. Even a slight slowdown in growth can be enough to send prices down sharply because investors worry that the long-term growth potential is going down.
On the other hand, people think of value stocks as safer investments. Most of the time, they are fully grown, well-known businesses that have already become leaders in their fields and don’t have as much room to grow. But because their business models are reliable and have stood the test of time, they can be good options for people who want more market stability while still getting some of the benefits of stocks.
Dividend And Non-Dividend Stocks
Many stocks have regular dividends that are paid to their owners. Dividends are a good way for investors to make money, which is why dividend stocks are so popular in some investment circles. Technically, a company is a dividend stock if it pays even $0.001 per share.
But dividends aren’t a requirement for stocks. Even stocks that don’t pay dividends can be suitable investments if their prices increase over time. Some of the world’s biggest companies don’t pay dividends, but in recent years, the trend has been for more stocks to pay dividends to their shareholders.
Blue-Chip Stocks
Blue-chip stocks are good for investors who prefer steady returns and dividends they can count on. Although there is no clear definition of blue-chip stocks, they tend to have a few things in common. They are large companies with well-known names, decades of reliable performance, a history of steady earnings, and a history of paying out dividends regularly.
But since these companies have been around for a long time, you can expect the cost per share to be higher. Also, keep in mind that blue-chip stocks probably won’t grow like rockets.
Some examples of blue-chip stocks are Microsoft Corporation (MSFT), the pioneer in computers, McDonald’s Corporation (MCD), the leader in fast food, and Exxon Mobil Corporation (XOM), the leader in energy.
Penny Stocks
A penny stock is an equity that is worth less than $5 and is very risky. Even though some penny stocks trade on major exchanges, some trade on the OTCQB, which is a middle-tier over-the-counter (OTC) market for U.S. stocks run by OTC Markets Group. Investors who want to buy or sell penny stocks should think about using limit orders because the difference between the bid and ask price is often big.
After the movie The Wolf of Wall Street came out, which was about a former stockbroker who ran a scam with penny stocks, penny stocks became very popular. The iShares Micro-Cap ETF is a good option for investors who want to bet on penny stocks (IWC).
Income Stocks
Income stocks are almost the same as dividend stocks because most stocks pay out money in the form of dividends. But “income stocks” can also mean shares of companies whose business models are more established and have fewer long-term growth opportunities. Income stocks are a favorite of people who are already retired or are close to them. They are great for conservative investors who need cash from their investments right now.
Most of the time, these stocks, like utilities, are less volatile and have less capital appreciation than growth stocks. This makes them good for investors who don’t like taking risks and want a steady income.
IPO Stocks And EGS Stocks
IPO stocks are defined as shares of companies that have just made their first public offering. IPOs are often very exciting for investors who wish to get in on the ground floor of a promising business idea. But they can also be very hard to predict, especially when investors have different ideas about how likely it is that they will grow and make money. Most stocks stay IPO stocks for at least a year, and sometimes for as long as two to four years after they go public.
Environmental, social, and corporate governance (ESG) stocks focus on protecting the environment, making sure people are treated fairly, and running a business in an honest way. For example, a company that agrees to cut its carbon emissions at a faster rate than national and industry goals or that makes equipment for renewable energy infrastructure could be an ESG stock.
In recent years, millennials, who are more inclined to invest in things they believe in and support, have become more interested in ESG stocks.
Small-cap, Mid-cap, And Large-cap Stocks
The total value of all of a stock’s shares, or its “market capitalization,” is another way to group stocks. Large-cap stocks are shares of the biggest companies by market capitalization. Mid-cap and small-cap stocks are shares of smaller companies.
There is no clear line that divides these groups from one another. But one rule that is often used is that stocks with market capitalizations of $10 billion or more are considered large-caps, stocks with market capitalizations between $2 billion and $10 billion are considered mid-caps, and stocks with market capitalizations of less than $2 billion are considered small-caps.
Most people think of large-cap stocks as safer and more conservative investments. Mid-cap stocks and small-cap stocks, on the other hand, have more growth potential but are riskier. But just because two companies are in the same group here doesn’t mean they are the same as investments or that they will do the same in the future.
