Historically, investing in the stock market has been one of the most essential routes to financial success. When researching stocks, you’ll frequently hear them mentioned in terms of numerous stock categories and classifications.
When most people think of stocks, they think of publicly traded shares traded on a stock exchange. However, it is critical for investors to understand the many types of stocks available, as well as their specific qualities, in order to evaluate whether they may represent a viable investment.
A stock is an investment in a publicly traded corporation. When a firm sells stock to the public, the stock is normally offered as one of two types: common stock or preferred stock. Stocks are also classified according to the size of the company, the industry, the geographic location, and the style.
Understanding different stock categories can help investors make more informed investment decisions and reduce portfolio risk, for example:
- Preferred stock gives holders regular dividend payments before dividends are issued to common shareholders but doesn’t provide voting rights.
- Income stocks provide regular income by distributing a company’s profits, or excess cash, through dividends that are higher than the market average.
- Blue-chip stocks are shares of well-established companies with a large market capitalization.
- ESG stocks emphasize environmental protection, social justice, and ethical management practices.
The following are the major types of stocks any potential investor should know about:
Common stock
Most stock that people invest in, is common stock. The common stock also referred to as ordinary shares, represents partial ownership in a company. This stock class entitles investors to profits, which are typically distributed in the form of dividends. A company’s board of directors is elected by its common stockholders, who also vote on corporate policy.
Holders of this stock class have access to a company’s assets in the case of a liquidation, but only after preferred stockholders and other debt holders have been paid. Common stock is often distributed to company founders and employees.
Theoretically, common stock gives shareholders unlimited upside potential, but they also risk losing everything if a company fails without having any assets left over.
Preferred stock
Preferred stock, also known as preference shares, entitles the bearer to monthly dividend payments before common stockholders. Preferred shareholders are also paid first if the company is dissolved or goes bankrupt. Preferred stock has no voting rights and is ideal for investors looking for consistent passive income. As an investment, preferred stock frequently matches fixed-income bond investments more closely than standard common stock.
Many businesses issue both common and preferred shares.
Growth Stocks
Another approach to categorizing distinguishes between two prominent investment methods. Growth investors like companies whose sales and profits are rapidly increasing, whereas value investors prefer companies whose shares are inexpensive, whether in comparison to their rivals or to their previous stock price.
Growth stocks are shares that are predicted to expand faster than the overall market. In general, growth companies outperform during periods of economic boom and low-interest rates. Growth stocks carry a higher amount of risk, but the potential returns can be quite appealing. Businesses that tap into strong and rising customer demand, particularly in relation to longer-term societal changes that encourage the use of their products and services, are the hallmarks of successful growth stocks.
Value Stocks
Value stocks, on the other hand, generally trade at a discount to what a company’s performance might otherwise indicate, with more appealing prices than the overall market. During moments of economic recovery, value companies, such as financial, healthcare, and energy names, tend to outperform since they often generate consistent revenue streams. Value stocks are thought to be safer investments. They are frequently established, well-known organizations that have already evolved into market leaders and, as a result, do not have as much room to grow further. However, with dependable business structures that have withstood the test of time, they can be attractive choices for people seeking more price stability while retaining some of the benefits of stock exposure.
Over the last ten years, growth stocks have outperformed value equities by around 5.93 percent.
Income Stocks
Dividend stocks are another name for income stocks, as most stocks give out money in the form of dividends. Income stocks generate consistent income by distributing a company’s gains, or extra cash, in the form of higher-than-average dividends. These companies often have lower volatility and less capital appreciation than growth equities, making them suited for risk-averse investors seeking a consistent income source.
Income stocks, on the other hand, relate to shares of firms with more mature business models and less long-term potential for growth and are perfect for conservative investors who need to draw cash from their investment portfolios. Income stocks are popular among folks who are in or nearing retirement.
Blue-Chip Stocks
Blue-Chip stocks are a stock category based on perceived quality. They are the cream of the crop in the business world, featuring companies that lead their respective industries and have earned strong reputations.
Blue-chip stocks are well-known corporations with substantial market capitalization. They have a long track record of generating consistent earnings and excelling in their business or sector. Conservative investors may want to top-weight their portfolios with blue-chip firms, especially during times of uncertainty.
They don’t always deliver the best returns, but their consistency makes them popular among investors with lower risk tolerance.
Cyclical Stocks
The success of the economy has a direct impact on cyclical stocks, which typically follow economic cycles of expansion, peak, recession, and recovery. In periods of economic prosperity, when customers have more discretionary income, they typically exhibit higher volatility and outperform other stocks.
National economies tend to go through expansionary and contractionary cycles, with periods of prosperity and recession. Certain businesses are more vulnerable to large business cycles, and as a result, investors refer to them as cyclical equities.
Because an economic downturn can reduce customers’ capacity to make large purchases quickly, cyclical equities comprise shares of companies in areas such as manufacturing, travel, and luxury goods. When the economy is robust, though, a surge of demand might cause these businesses to bounce swiftly.
Non-Cyclical or Defensive Stocks
Non-cyclical stocks, on the other hand, operate in “recession-proof” businesses that tend to perform pretty well regardless of the economy. In an economic slowdown or slump, non-cyclical equities typically outperform cyclical firms because demand for core products and services stays generally stable.
Non-cyclical stocks, often known as secular or defensive stocks, do not experience large fluctuations in demand. Grocery shop chains are an example because, no matter how good or bad the economy is, people still need to eat.
In most economic and stock market scenarios, defensive stocks produce stable returns. During a sell-off or bear market, defensive stocks can help safeguard a portfolio from steep losses. A defensive stock can also be a value stock, an income stock, a non-cyclical stock, or a blue-chip stock.
Because of their potential to deliver consistent returns during periods of economic instability, defensive stocks are less likely to fail.
IPO Stock
When a corporation goes public, it sells stock in an initial public offering (IPO) (IPO). Before the company’s equity is listed on the stock exchange, IPO stock is often allocated at a discount. It may also include a vesting plan to discourage investors from selling all of their shares when the stock first goes public. When referring to newly listed stocks, market analysts also use the term “IPO stocks.”
IPOs frequently elicit a great deal of interest from investors wanting to get in on the ground floor of a promising business concept. They can, however, be volatile, particularly when there is debate among investors regarding their possibilities for growth and profit. A stock’s status as an IPO stock is normally retained for at least a year and up to two to four years after it goes public.
Penny Stocks
Penny stocks are low-quality enterprises with stock values that are exceedingly low, usually less than $1 per share. A penny stock is a very speculative investment. Although some penny stocks are traded on major exchanges, the majority are traded on a middle-tier over-the-counter (OTC) market. Limit orders should be used when placing buy and sell orders in penny stocks because there is often a wide difference between the bid and ask price.
Penny stocks are prone to schemes that can drain your entire investment due to their highly speculative business strategies. It is critical to understand the risks associated with penny stocks.
ESG Stocks
Environmental, social, and corporate governance (ESG) stocks place a premium on environmental stewardship, social justice, and ethical corporate governance standards. For example, an ESG stock could be a company that commits to reducing carbon emissions faster than required by national and industry standards, or one that manufactures equipment for renewable energy infrastructure.
In recent years, ESG equities have gained favor among millennials—a socially conscious generation that is more likely to invest in causes they believe in and support.
Other collateral effects on the environment, firm employees, customers, and shareholder rights are considered under ESG principles.
Socially responsible investing, or SRI, is a subset of ESG. Investors that employ SRI weed out stocks of firms that do not live up to their core values. However, ESG investing has a more positive component in that, rather than simply rejecting companies that fail key tests, it actively promotes investment in the best performers. With studies demonstrating that adhering to ESG principles can boost investment returns, there is considerable interest in the topic.
Large-cap, mid-cap, and small-cap stocks
Stocks are also classified based on the entire value of all their shares, which is known as market capitalization. Large-cap stocks are those with the highest market capitalizations, whereas mid-cap and small-cap stocks represent smaller enterprises.
There is no clear dividing line between these two categories.
Large-cap companies are often thought to be safer and more conservative investments, whereas mid-cap and small-cap stocks have more potential for future growth but are riskier. However, just because two firms are in the same category here does not imply that they have anything else in common as investments or that they would perform similarly in the future.
Domestic stocks and international stocks
Stocks can be classified based on their geographical location. Most investors look to the location of the company’s official headquarters to identify domestic equities from overseas companies.
However, it is critical to recognize that a stock’s geographical categorization does not always match to the location of the company’s sales. It can be difficult to identify whether a company is truly local or international based on business operations and financial data, particularly among huge multinational corporations.
Dividend stocks and non-dividend stocks
Many stocks pay out dividends to shareholders on a regular basis. Dividends provide valuable income to investors, making dividend stocks quite desirable in some investment circles.
Stocks, on the other hand, are not required to pay dividends. Non-dividend equities might still be good investments if their values improve in the long run. Some of the world’s largest corporations do not pay dividends, while the trend in recent years has been toward more equities paying dividends to owners.
Safe stocks
When compared to the general stock market, safe stocks have relatively minimal up-and-down volatility in their share values. Safe stocks, also known as low-volatility stocks, often operate in industries that are less sensitive to shifting economic situations. They frequently provide dividends as well, and this income can help to offset dropping share prices during difficult times.
FAQ
What Is the difference between common stock and preferred stock?
Preferred stock gives holders priority over a company’s income while Common stock also referred to as ordinary shares, just represent partial ownership in a company.
What type of investor prefers income stocks?
Income stocks suit risk-averse investors who seek regular income through dividend payments.
What are defensive stocks?
Defensive stocks generally provide consistent returns in most economic conditions and stock market environments.
What is growth vs value stocks?
Value stocks often present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.
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