Historically, investing in stocks has been one of the most essential paths to financial success. The stock market can be scary for new investors. With market volatility and financial jargon tossed often by commentators, it can be difficult to know where to begin with stocks. Fortunately, stocks aren’t as complicated as they appear, and while there are many types of stocks, they all share a lot in common.
As you study stocks, you’ll frequently hear them discussed in terms of different stock categories and classifications. The following are the major types of stocks you should be familiar with.
| LIST | TYPE |
| 1 | Common stock |
| 2 | Preferred stock |
| 3 | Large-cap stocks |
| 4 | Mid-cap stocks |
| 5 | Small-cap stocks |
| 6 | Domestic stock |
| 7 | International stocks |
| 8 | Growth stocks |
| 9 | Value stocks |
| 10 | IPO stocks |
| 11 | Dividend stocks |
| 12 | Non-dividend stocks |
| 13 | Income stocks |
| 14 | Cyclical stocks |
| 15 | Non-cyclical stocks |
| 16 | Safe stocks |
| 17 | ESG stocks |
| 18 | Blue chip stocks |
| 19 | Penny stocks |
Common stock
When you consider investing in stocks, you most often think of common stock. Common stock offers you an ownership stake in the firm and the right to vote on important issues like electing the board of directors or enacting specific company rules.
When people hear the word stock, they frequently envision intricate charts with flashing prices that fluctuate throughout the day. When you buy stock, you are investing in a real firm, and your long-term returns will be determined by the company’s earnings and general profitability. Earnings growth will contribute to a higher share price for common stock owners, allowing the corporation to distribute those earnings with shareholders in the form of dividends.
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Preferred stock
Preferred stock is more of a bond than a stock. Typically, you will not have voting rights, but you will be paid dividends before common investors. Preferred stock is issued at par value and redeemed at maturity, therefore you do not have the same possibility for price appreciation as common stock. Dividends will be your primary source of return.
Preferred stock can be redeemed before maturity, and some preferred shares convert into a specified number of common shares. While preferred stock offers fewer opportunities for big returns than common stock, it also carries far lesser risk.
Large-cap, mid-cap, and small-cap stocks
Stocks are also classified by the entire value of all their shares, which is known as market capitalization. Companies with the highest market capitalizations are known as large-cap stocks, while mid-cap and small-cap stocks represent smaller companies.
There is no clear dividing line between these categories. However, one commonly used guideline is that companies with market capitalizations of $10 billion or more are considered large-caps, while stocks with market capitalizations ranging from $2 billion to $10 billion are considered mid-caps and stocks with market capitalizations less than $2 billion are considered small-cap stocks.
Large-cap companies are generally regarded as safer and more conservative investments, whereas mid-cap and small-cap equities have more potential for future growth but are riskier. However, just because two companies fall into the same category does not imply that they share any other investments or that they would perform similarly in the future.
Domestic stocks and international stocks
You can categorize stocks based on their location. Most investors consider the location of the company’s official headquarters when separating domestic US stocks from international companies.
Nevertheless, it is crucial to note that a stock’s geographical categorization does not always match to where the company makes its sales. Philip Morris International (PM -0.32%) is an excellent example, as its headquarters are in the United States, but it only sells tobacco and other items outside of the country. It can be difficult to determine whether a company is truly domestic or foreign, particularly among huge multinational corporations, based on business operations and financial data.
Growth stocks and value stocks
Another categorization method distinguishes between two common investment strategies. Growth investors choose to invest in firms that are experiencing rapid growth in sales and earnings. Value investors seek out companies whose shares are inexpensive, whether in comparison to their peers or to their own historical stock price.
Growth stocks carry more risk, but the potential gains can be quite appealing. Successful growth stocks have businesses that capitalize on strong and rising customer demand, particularly in relation to longer-term societal developments that encourage the use of their products and services. However, competition can be severe, and if competitors undermine a growth stock’s operation, it can swiftly lose popularity. Even a slowing growth rate can cause prices to fall quickly, as investors believe that long-term growth potential is dwindling.
In contrast, value equities are thought to be more cautious investments. They are frequently mature, well-known enterprises that have already established themselves as industry leaders and thus have less room to grow. However, with dependable business structures that have endured the test of time, they can be attractive options for people looking for more price stability while still reaping some of the benefits of stock ownership.
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IPO stocks
IPO stocks are those of companies that have recently gone public via an initial public offering. IPOs can elicit a lot of excitement from investors looking to get in on the ground floor of a great business concept. However, they can be volatile, particularly when there is debate among investors regarding their possibilities for development and profit. A stock’s position as an IPO stock typically lasts at least a year and up to two to four years after it goes public.
Dividend stocks and non-dividend stocks
Many stocks pay dividends to their shareholders on a regular basis. Dividends provide substantial income to investors, making dividend stocks popular in certain investment circles. Even if a corporation pays $0.01 per share, it is considered a dividend stock.
However, stocks are not required to pay dividends. Non-dividend stocks might still be good investments if they improve in price over time. Some of the world’s largest firms do not pay dividends, while the trend in recent years has been toward more equities paying dividends to owners.
Income stocks
Dividend stocks are also known as income stocks because the majority of stocks pay out dividends. However, income stocks can include shares in companies with more established business structures and less long-term growth potential. Income stocks are popular among retirees and other conservative investors who need to withdraw cash from their investment portfolios right now.
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Cyclical stocks and non-cyclical stocks
National economies typically go through cycles of expansion and decline, with periods of prosperity and recession. Certain businesses are more exposed to wide business cycles, thus investors refer to them as cyclical equities.
Cyclical stocks include shares in businesses such as manufacturing, travel, and luxury goods, as an economic downturn might limit customers’ capacity to make large purchases fast. When economies are robust, however, a surge in demand can cause these enterprises to bounce dramatically.
Non-cyclical equities, often known as secular or defensive stocks, do not see such large swings in demand. Grocery store chains are an example of non-cyclical equities since people need to eat regardless of the state of the economy. Non-cyclical companies perform better during market downturns, whereas cyclical stocks frequently excel during strong bull markets.
Safe stocks
Safe stocks are those whose share values fluctuate only slightly in comparison to the total stock market. Safe stocks, also known as low-volatility stocks, are often found in businesses that are less susceptible to economic fluctuations. They frequently pay dividends, which can help offset declining share prices during difficult times.
Stocks categorized by sector
Stocks are frequently divided into categories based on their industry. Stock market sectors are among the most commonly utilized fundamental groupings.
- 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
ESG stocks
ESG investing is an investment strategy that emphasizes environmental, social, and governance concerns. Rather than focusing solely on whether a company makes a profit and grows its income over time, ESG principles take into account other factors such as environmental effect, corporate employees, customers, and shareholder rights.
Socially responsible investing, or SRI, is governed by ESG rules. SRI investors avoid stocks that do not align with their most essential ideals. However, ESG investing has a more positive aspect in that, rather than just rejecting companies that fail critical tests, it actively encourages investment in the companies that perform the best. With research demonstrating that a firm commitment to ESG principles can boost investment returns, there is a lot of interest in the topic.
Blue chip stocks
Finally, there are stock categories that rely on decisions on perceived quality. Blue Chip stocks are typically the cream of the crop in the business world, representing companies that lead their respective industries and have established strong reputations. They normally do not deliver the absolute maximum returns, but their consistency makes them popular among investors with a reduced risk tolerance.
Penny stocks
Penny stocks are low-quality enterprises with stock values of less than $1 per share. Penny stocks, with their risky business structures, are vulnerable to schemes that can drain your entire investment. It’s critical to understand the pitfalls of penny stocks.
You’ve probably heard that portfolio diversification is critical for making solid, reliable investments. Keep all of these stock classifications in mind when planning for diversification; investing in companies with varying market capitalizations, geographies, and investing strategies helps to a well-balanced portfolio.
Bottom line
While there are numerous sorts of stocks, they all represent ownership in actual firms. No firm is intrinsically a growth or value stock, and it is likely that it will shift between these categories throughout its existence. Before purchasing a stock, always conduct a business analysis to determine the company’s competitive position and valuation.
You can also buy baskets of different types of equities through ETFs and mutual funds that track various indexes. Funds may hold value or growth equities across all market capitalizations. Funds are an excellent method to gain exposure to a specific sector of the stock market without having to undertake extensive research on individual companies.
