What are the types of Stocks?
When you think of stocks, you might think of big companies like Apple or Amazon. But there are actually different types of stocks, and each type has its own set of characteristics. In this blog post, we will explore the different types of stocks and what makes each one unique. From common stock to preferred stock and more, read on to learn about the different kinds of stocks and how they can be used in your investment portfolio.
What are Stocks?
A stock is a type of security that indicates ownership in a corporation and represents a claim on the corporation’s assets and earnings. There are two main types of stocks: common stock and preferred stock. Common stock is what most people think of when they think of stocks. It entitles the owner to vote at shareholders’ meetings and to receive dividends but does not guarantee any particular rate of return. Preferred stock pays fixed dividends and has priority over common stock in the event of liquidation, but does not come with voting rights.
What is the Stock Market?
The stock market is a collection of markets where stocks (pieces of ownership in businesses) are traded between investors. It usually refers to the exchanges where stocks and other securities are bought and sold. The stock market can be used to measure the performance of a whole economy or particular sectors of it.
What are the types of Stocks?
There are various types of Stocks. These are:
- Common Stock and Preferred Stock
- Large-cap, Mid-cap, and Small-cap stocks
- Domestic stocks and International stocks
- Growth stocks and Value stocks
- IPO stocks
- Dividend stocks and non-dividend stocks
- Income stocks
- Cyclical stocks and non-cyclical stocks
- Safe stocks
- Stocks categorized by sector
- ESG stocks
- Blue chip stocks
Common Stock and Preferred Stock
Common stock makes up the majority of stock investments. Shareholders of common stock, which represents a component of a company’s ownership, are entitled to a proportionate share of the assets’ value in the event that the business is dissolved. Shareholders of common stock have theoretically limitless upside potential. However, they also run the risk of losing everything if the business fails with no assets left over.
Preferred stock grants owners the right to get a specific amount of money back in the event of a firm dissolution before common shareholders. Additionally, preferred shareholders are entitled to dividend distributions ahead of common shareholders. Overall, this leads to preferred stock having more in common with fixed-income bond investments than standard common stock as an investment. A corporation will frequently only sell common stock. This makes logical because stockholders typically want to acquire that.
Large-cap, Mid-cap, and Small-cap stocks
The market capitalization of stocks refers to how much money all of their shares collectively are worth. The largest market capitalizations of firms are referred to as large-cap stocks, while successively smaller companies are represented by mid-cap and small-cap stocks.
These groups are not well delineated from one another. However, one frequently-used criterion states that equities are considered to be large-cap if their market capitalization is $10 billion or over, mid-cap if their market capitalization is between $2 billion and $10 billion, and small-cap if their market capitalization is under $2 billion.
Mid-cap and small-cap stocks offer higher potential for future growth but are riskier than large-cap equities, which are typically seen as safer and more conservative investments. But just because two businesses are grouped together here doesn’t indicate they are similar investments or that they will perform similarly in the future.
Domestic Stocks and International Stocks
Stocks can be grouped according to their location. Most investors consider the location of the company’s official headquarters to help them distinguish domestic U.S. equities from foreign companies.
It’s crucial to realize that a stock’s geographical classification does not always correlate to the region from which the company derives its sales. A famous example is Philip Morris International (NYSE:PM), which has its headquarters in the United States but sells all of its tobacco and other products abroad. It can be challenging to determine a company’s true domestic or international status based on business operations and financial data, especially for large multinational businesses.
Growth Stocks and Value Stocks
Two common investment strategies are distinguished by another categorization technique. Growth investors typically search for businesses whose sales and profitability are rising quickly. Value investors seek out businesses whose stock is undervalued, whether in comparison to their rivals or to their own historical stock price.
Growth stocks often carry higher levels of risk, but the potential rewards can be very alluring. Businesses with high and rising customer demand, particularly in relation to longer-term changes in society that encourage the use of their products and services, are successful growth stocks. However, competition can be severe, and if competitors undermine a growth stock’s operations, it may swiftly lose popularity. Investors’ concern that long-term growth potential is dwindling can sometimes cause even a slight slowdown in growth to cause prices to drop quickly.
Value stocks, however, are thought to be more cautious purchases. They frequently are established, well-known businesses that have already developed into market leaders and so don’t have as much room to grow. However, they can be ideal options for people looking for more price stability while still obtaining some of the benefits of exposure to equities. This is because they have dependable business structures that have withstood the test of time.
IPO stocks are the shares of businesses that have just completed an initial public offering. When a new company goes public, investors who want to invest early in a good business idea are frequently quite excited. However, they can also be risky, particularly if the investment community is divided over their potential for development and profit. After going public, a stock typically keeps its status as an IPO stock for at least a year and up to two to four years.
Dividend Stocks and Non-Dividend Stocks
A lot of stocks regularly pay dividends to their shareholders. Because dividends offer significant income to investors, dividend stocks are highly prized in several financial spheres. Technically, a corporation qualifies as a dividend stock if it pays even $0.01 per share.
However, stocks are exempt from dividend obligations. Stocks that don’t pay dividends can nevertheless make solid investments if their prices increase over time. Even if the trend in recent years has been toward more stocks paying dividend payouts to their shareholders, some of the largest corporations in the world still do not pay dividends.
Since most companies give out income in the form of dividends, income stocks are simply another name for dividend stocks. However, shares of businesses with more established business models and relatively fewer long-term growth potential are also referred to as income stocks. Income stocks are popular among individuals in or close to retirement. This since they are ideal for conservative investors who need to withdraw cash from their investment portfolios right away.
Cyclical Stocks and Non-Cyclical Stocks
National economies frequently experience expansionary and contractionary cycles, as well as boom times and busts. Investors refer to certain companies as cyclical stocks because they are more vulnerable to general business cycles.
Shares in businesses engaged in manufacturing, travel, and luxury products are examples of cyclical equities. This is because a downturn in the economy might impair consumers’ capacity to swiftly make large purchases. However, when economies are robust, a surge in demand may cause these businesses to quickly recover.
Non-cyclical companies, usually referred to as secular or defensive stocks, don’t experience those significant fluctuations in demand. Grocery store companies are an example of non-cyclical equities. This is because people still need to eat whether the economy is doing well or poorly. While cyclical stocks frequently thrive during robust bull markets, non-cyclical stocks typically do better during market downturns.
Safe stocks are those whose share values experience relatively minor ups and downs when compared to the entire stock market. These sometimes referred to as low-volatility equities, are frequently found in sectors of the economy that are less susceptible to fluctuations. Additionally, they frequently provide dividends; in difficult times, this income can compensate for dropping share values.
Stocks categorized by Sector
Stocks are frequently categorized according to the industry they are in. Stock market sectors such as the ones in the health, energy, and financial industries are among the basic classifications that are most frequently used.
ESG investing is a term for an investment philosophy that emphasizes issues related to the environment, society, and governance. Its principles take into account additional collateral effects on the environment, business employees, customers, and shareholder rights rather than concentrating solely on whether a firm makes a profit and increases its income over time.
Socially responsible investing, or SRI, is linked to the regulations that govern ESG. SRI investors eliminate equities from businesses that don’t align with their core beliefs. ESG investing has a more advantageous aspect, though, in that it actively promotes investing in the companies that perform things the best rather than simply rejecting those that fail important tests. Research has shown that adhering to ESG principles can increase investment returns.
Blue Chip Stocks
There are stock categories as well, which make decisions based on perceived quality. Blue Chip firms are often the best of the best in the corporate world, dominating their respective industries and building solid reputations. Although they normally don’t offer the maximum profits possible, investors with lesser risk tolerance choose them because of their consistency.
Which types of Stocks are best for investments?
There are many different types of stocks, and each has its own characteristics. Some factors to consider when choosing a stock include the company’s financial stability, the stock’s history, and the current market conditions.
One type of stock that is often considered a good investment is a blue chip stock. These are stocks of large, well-established companies that have a history of solid financial performance. Blue chip stocks tend to be less volatile than other types of stocks. Hence, they offer investors a greater degree of safety.
Another type of stock that can be a good investment is a growth stock. Growth stocks are typically associated with companies that are experiencing rapid growth and are expected to continue to do so in the future. These stocks can be more volatile than blue chips, but they also offer the potential for higher returns.
Value stocks are another option for investors looking for good investments. Value stocks are those that trade at a price below their intrinsic value. This type of stock may be undervalued by the market and offer investors the potential for above-average returns.
Ultimately, there is no one “best” type of stock for investments. The best type of stock for an individual investor depends on that investor’s goals, risk tolerance etc.