A company stock represents a share in the ownership of that company. Investments in stock markets have historically been one of the most popular pathways to financial prosperity. As we will delve deeper into stocks, we will come across a long list. Different types of stocks exist in our financial markets. These stocks are classified into different categories based on different parameters. So, here are the types of stocks you need to know:
1. Types of Stocks Based on Preference at the Time of Dividend Distribution and Company Dissolution
Common Stock and Preferred Stock
Common stock is the most popular type of stock. By purchasing common stock, the stockholders purchase partial ownership of the company. If the company gets dissolved, the common stockholders will receive a proportional share of left-over assets, if any. This stock has unlimited upside potential. But there is also a risk of losing everything if the company does not have any left-over assets at the time of dissolution.
However, preferred stock works slightly differently. This stock gives shareholders a preference over common shareholders to receive money when the company dissolves. Additionally, preferred stockholders get a preference over common stockholders while dividends are being distributed. Therefore, investment in preferred stock is more like an investment in fixed income bonds.
Often companies offer only common stock. This is logical as investors demand common stock more than preference stock.
2. Types Of Stocks Based on the Market Capitalization of Companies
Large-Cap, Mid-Cap, and Small-Cap Stocks
The market capitalization of a company refers to the total worth of all its shares that are currently being traded on the stock exchange.
Companies with the largest market capitalizations are known as large-cap stocks, while mid-cap and small-cap stocks are stocks of relatively smaller companies.
There is no definite line to separate these categories from each other. However, a thumb rule is that stocks with a market capitalization of $10 billion or more are counted as large-cap stocks. While stocks with market capitalization between $2 billion and $10 billion are treated as mid-cap stocks. Additionally, stocks with market capitalization lower than $2 billion qualify as small-cap stocks.
Large-cap stocks are usually safer and are more conservative investments. But mid-cap and small-cap stocks have greater growth potential and are riskier as well.
3. Types Of Stocks Based on the Geographic Location of the Company’s Headquarters
Domestic Stocks and International Stocks
To distinguish domestic US stocks from international stocks, many investors consider the location of the company’s official headquarters.
However, we need to understand that a stock’s geographical category may not always indicate where the company gets its sales from. For instance, Philip Morris International has its headquarters in the US, but it sells tobacco and its other products exclusively outside the US. Thus, it is quite difficult to find out whether a company is domestic or international just from its business operations and financial metrics.
4. Types Of Stocks Based on the Nature of Stocks
Growth Stocks and Value Stocks
Growth investors search for companies that are experiencing high sales and profits. While value investors search for companies having lower share prices as compared to their peers.
Growth stocks have higher risk levels, but they also offer attractive returns. Successful growth stocks are stocks of those companies that leverage rising consumer demand. These businesses are exposed to high competition. Thus, if a competitor disrupts its business, the price of the growth stock can reduce quickly. For that matter, even a growth slowdown can lower the growth stocks’ prices.
However, value stocks are considered as more conservative investments. These stocks are of mature and popular companies. These companies are already industry leaders and do not have the scope to expand further. They have thrived on reliable business models. Therefore, investors looking for price stability like these stocks.
5. Types Of Stocks Based on Dividend Paid on the Stocks
Dividend Stocks and Non-Dividend Stocks
Many stocks pay annual or interim dividends to the shareholders. Dividends represent a valuable and regular income for investors. This makes dividend stocks very attractive to certain groups of investors. A company paying just a $0.01 dividend per share may classify as a dividend stock.
However, non-dividend stocks do not pay dividends. Non-dividend stocks can also be strong investments provided they offer capital appreciation to the shareholders. Capital appreciation refers to the absolute increase in the stock price compared to the initial purchase price.
A lot of big companies do not prefer to pay dividends. However, the recent trend shows that more companies are paying dividends to their shareholders.
6. Types Of Stocks Based on the Perceived Value of the Stocks
Blue-Chip Stocks and Penny Stocks
Blue-chip stocks are stocks of those companies that are leaders in their respective industries. They hold a strong reputation in the market. Often, they do not provide the highest returns, but they do have provide stability to stockholders. This feature makes them popular among investors having lower risk tolerance.
However, penny stocks have lower perceived value. Their stock prices are very low, even lower than $1 per share. They thrive on highly speculative business models. Thus, they pose a risk of draining investors’ entire investment.
7. Types Of Stocks Based on Cyclicity of Economic Phases
Cyclical Stocks and Non-Cyclical Stocks
National economies undergo periodic phases of expansion and contraction and have periods of prosperity and recession. Few stocks are more exposed to these broad business cycles. Cyclical stocks can be seen in industries such as manufacturing, travel, and luxury goods. Draining economies can ruin customers’ ability to make big purchases. However, when economies start to boom, there can be a sudden spike in purchases. This can make cyclical stocks’ prices rebound sharply.
However, non-cyclical stocks do not experience such demand fluctuations. They are also called secular or defensive stocks. For instance, grocery store chains. Regardless of the economic situation, people will continue to spend on eatables.
Historically, non-cyclical stocks have performed better during economic downturns while cyclical stocks have outperformed during bullish markets.
8. Types Of Stocks Based on Stock Market Sectors
Stocks can be classified based on the sectors they operate in. The different types of stocks based on sectors include:
- Technology, media, and telecommunication (TMT): telephone, internet, media and entertainment, hardware, software, and IT companies
- Consumer industry: retailers, hospitality, and hotel companies
- Consumer staples: food, beverage, tobacco, household, and personal products companies
- Energy: oil and gas exploration and production companies
- Financial and banking services: banks, hedge funds, mutual funds, insurance, and brokerage companies
- Life sciences and healthcare: healthcare providers, insurers, pharmaceutical companies, and medical device makers
- Heavy industries: aviation, aerospace and defense, construction, logistics, and rail machinery companies
- Materials: mining, forest products, construction resources, packaging, and other chemical companies
- Real Estate: infrastructure companies, real estate investment trusts (REITs), and other real estate management companies
- Utilities: electric, power, natural gas, water, renewable energy, and other multiproduct utility companies
Other Types Of Stocks:
IPO stocks are shares of those companies that have recently gone public via an initial public offering (IPO). IPOs usually generate a great amount of excitement among investors. But IPO stocks can be quite volatile. A stock generally remains an IPO stock for at least one year. It may continue to remain an IPO stock for as long as two to four years after it goes public.
Income stocks are nothing but dividend stocks. These stocks provide consistent income in the form of dividends. But income stocks may also refer to shares of companies having mature business models and fewer long-term growth opportunities. They are appropriate for conservative investors and for those who are nearing their retirement.
Safe stocks are stocks of companies whose share prices fluctuate less as compared to the overall stock market. They are also known as low volatility stocks. They are safe and they usually operate in industries that are insensitive to changing economic situations. Safe stocks do pay dividends as well.
ESG investing refers to an investment philosophy that lays importance on environmental, social, and governance (ESG) concerns. Instead of focusing completely on the company’s profits and revenues, ESG principles look at other collateral impacts as well. These collateral impacts include the impact on the environment, company employees, customers, and shareholder rights.
Tied to ESG’s principles, there is socially responsible investing, or SRI. Investors use SRI to screen out stocks of companies that do not adhere to ESG norms. Thus, ESG investing involves active investing in companies that follow ESG norms to the fullest.
There is evidence showing that a commitment towards ESG principles can improve investment returns. Thus, there is a lot of growing interest in this area.
You may have probably heard about portfolio diversification. Now that you know about the different types of stocks, you can plan your portfolio accordingly.
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Happy reading and happy investing!!