Things you might not have learned in school but should know about: Types of stocks
Stocks are not all the same, and they can be categorized in a variety of ways depending on their characteristics, the company they represent, and the investment strategy they support. Here's a breakdown of the most common types of stocks:
By Ownership and Rights
- Common Stock: This is the most prevalent type of stock. As a common shareholder, you have a partial ownership stake in the company. This ownership comes with two key rights:
- Voting Rights: You have the right to vote on major corporate decisions, such as electing the board of directors.
- Dividends: You may receive a portion of the company's profits in the form of dividends, but these are not guaranteed and can fluctuate. In the event of a company's liquidation, common shareholders are the last to receive any remaining assets after all creditors and preferred shareholders have been paid.
- Preferred Stock: Preferred stock is a hybrid between a common stock and a bond. It has different features from common stock:
- Fixed Dividends: Preferred stock typically pays a fixed dividend, which is more reliable than the variable dividends of common stock.
- Priority: In the event of liquidation, preferred shareholders have a higher claim on a company's assets than common shareholders.
- No Voting Rights: Generally, preferred stock does not come with voting rights.
By Market Capitalization
Market capitalization (or "market cap") is the total value of a company's outstanding shares. This classification is a way to measure the size of a company.
- Large-Cap Stocks: These are companies with a market cap of over $10 billion. They are typically well-established, stable, and less volatile than smaller companies. Examples include Apple, Microsoft, and Johnson & Johnson. They are often considered "blue-chip" stocks.
- Mid-Cap Stocks: These companies have a market cap between $2 billion and $10 billion. They are generally in a growth phase, offering more potential for appreciation than large-caps, but with slightly more risk.
- Small-Cap Stocks: These companies have a market cap under $2 billion. They are often younger companies with high growth potential, but they are also more volatile and carry higher risk.
- Micro-Cap Stocks: An even smaller category, these stocks have a very small market capitalization and are often highly speculative.
- Penny Stocks: These are typically stocks that trade for under $5 per share. They are highly speculative and often associated with smaller, less established companies.
By Investment Style
- Growth Stocks: These are stocks of companies whose earnings are expected to grow at a faster rate than the market average. These companies often reinvest their profits back into the business instead of paying dividends, with the goal of rapid expansion.
- Value Stocks: These are stocks that are considered undervalued by the market. They often have a low price-to-earnings (P/E) ratio and are bought by investors who believe the market has overreacted to negative news or simply overlooked the company's true value.
- Income Stocks: Also known as dividend stocks, these stocks are purchased primarily for the income they generate through consistent and often high dividend payments. They are often from well-established companies in stable industries, such as utilities.
By Industry and Economic Sensitivity
- Cyclical Stocks: These stocks are directly tied to the health of the economy. They tend to perform well during economic expansions and poorly during recessions. Examples include companies in the automotive, retail, and travel industries.
- Defensive Stocks: These are stocks of companies that provide essential goods and services, so their performance is less affected by economic downturns. They are also called "non-cyclical" stocks. Examples include companies in the utility, healthcare, and consumer staples (e.g., food and beverage) sectors.
- Blue-Chip Stocks: This is not a formal classification, but it refers to the stocks of large, well-known, and financially sound companies with a long history of stable earnings. They are generally considered safer investments. The term comes from the most valuable chip in poker.
