The investment marketplace is characterized by multiple types of stocks. Its variety is one compelling reason that consumer investors continue to be drawn to the commodity market.
Market watchers define stocks as a way to analyze their holdings and develop investment strategies. They can then make more informed decisions about their financial goals, risk tolerance, and hopes for solid returns on investment.
In this piece, we’ll take a look at how the market defines different types of stocks and how they relate to everyday investing.
Common Stock
What type of account is common stock? Generally, it’s what people tend to picture when thinking about types of stocks. It represents partial ownership in the company issuing the stock. Shareholders usually get voting rights to help elect the board of directors and rule on other matters of corporate interest.
Investors buy common stock in the belief that its value will appreciate over time. Rewards may come through capital gains or dividend payouts, though neither is assured.
If the company is liquidated, common stockholders receive their liquidated assets after debt holders and preferred stockholders. This is when it becomes important to understand preferred stock.
Preferred Stock
What type of stock usually has a high par value and par value dividend rate? That would be preferred stock. Income from a preferred stock is more predictable and consistent, but its chances of capital gains are not as good as common stock.
Preferred stock issues fixed dividends, and preferred shareholders get priority treatment over other classes. In other words, they get their payouts first. Preferred stocks are less prone to market volatility as well. And unlike common stockholders, preferred stockholders generally do not have voting rights in company matters.
Dividend Stocks
Dividend-paying stocks, also known as income stocks, are company shares that regularly give stockholders a slice of the profits they earn. These payouts are typically issued quarterly or annually. Companies that offer dividend stocks are generally well-known corporations with solid track records of financial performance.
Dividend stocks offer shareholders more consistent and swift cash returns, which make them solid options for retirees seeking steady and dependable sources of income. However, dividend stocks are less likely to break out or experience capital appreciation.
Growth vs. Value Stocks
Common and preferred stocks can also be framed in terms of growth and value stocks. Growth stocks are shares in businesses that are expected to gain in value at an accelerated rate.
Companies classified as growth stocks usually reinvest their earnings into research, expansion, and future growth. Though the potential for future capital gains is higher, growth stocks are more subject to market fluctuation and uncertainty.
Value stocks are shares in companies that may be perceived as undervalued in light of their intrinsic value and fundamentals. They’re usually traded at lower prices. Investors like value stocks because they’re good bargains that are less volatile and more likely to grow at dependable rates with little risk.
Investors often mix their portfolios between growth and value stocks. They take on growth stocks in hopes of generating income. They also rely on more stable value stocks to give their portfolios a solid foundation.
Blue-Chip Stocks
Blue-chip stocks are the biggest of the big. They’re large, established, brand-name corporations with extensive histories of consistent growth and stable earnings. Blue-chip companies are known for surviving market downturns and wielding significant influence over the industries they represent. Examples of blue-chip stocks include:
- Apple
- Microsoft
- Coca-Cola
- Johnson & Johnson
- Procter & Gamble
These are foundational value stocks that offer modest but consistent returns.
International Stocks
International types of stocks are, as you’d expect, shares in companies that operate outside of the investor’s home country. These stocks give investors exposure to foreign markets and may be deployed to promote stock diversification, a reliable method to mitigate risk and volatility.
International stocks are frequently situated in emerging international companies. These businesses offer the potential for future growth as those markets strive for financial independence.
Cyclical and Defensive Stocks
These two types of stocks are evaluated in view of economic cycles. Cyclical stocks are more subject to market fluctuations; they thrive when the economy is growing but get hit extra hard in recessions. Defensive stocks are more stable, representing goods and services that are always in demand no matter what condition the market is in.
The two consumer-oriented business sectors in the stock market highlight the differences between cyclical and defensive stocks. Consumer staples include necessities like food and common household items. Consumer discretionary, on the other hand, covers less common purchases like cars, furniture, and travel.
IPO Stocks
When a startup company decides to go public, its first appearance on the stock exchange is marked by its initial public offering (IPO). The company issues stocks to investors in exchange for capital to expand, repay debts, and see to other business needs.
IPO stocks are largely reserved for institutional investors, venture capitalists, and high-net-worth individuals known for helping businesses start out. After the initial wave of funding by IPO investors, shares can be purchased by the general public over the stock exchange.
Penny Stocks
In a sense, all stocks have been penny stocks at some point. They represent small, low-priced companies traded for under $5 a share. Many of them are represented on the over-the-counter marketplace rather than major stock exchanges, though some can appear on more general markets as well.
Investors take on penny stocks for their potential upside. They have faith that the company will expand and return profit in the long term. Investors can easily afford multiple shares at a reasonable price in the hopes that the company will grow exponentially, like Amazon and Netflix.
However, penny stocks are particularly vulnerable to price swings and restricted trading volume. Information on penny-stock companies is sometimes scant as well, which can make them blind-faith options. Investors should research such stocks deeply before investing, but the lure is often too strong for some to resist.
ESG Stocks
One of the newer stock classifications focuses on business ethics and sustainability: environmental, social, and governance (ESG) stocks. The goal of these companies is to improve society in a positive way. They do so by focusing on environmental impact, fair labor practices, transparent management, and strong corporate governance standards.
The theory — or, at least, the hope — with ESG stocks is that their ethical uprightness will be rewarded with future long-term profitability. They are competitive to an extent but largely depend on high trading volume from ethically minded investors.
Market Cap
Stocks are often classified according to the total value of their outstanding shares. Small-cap companies are worth less than $2 billion (which is still a lot to most people). Medium-cap companies are worth between $2 and $10 billion, and large-cap companies are worth more than $10 billion.
Market cap is often a consideration when an investor is diversifying their portfolio. Large-cap companies can provide a foundation for financial stability, while small- and medium-cap companies can offer rewards if they grow and expand as investors hope.
ETFs
Finally, many consumer investors turn to exchange-traded funds (ETFs) that bundle several stocks into single funds. Investors can buy ETFs directly from a public stock exchange. ETFs bring together stocks that are related in some way. They may all be:
- Large-cap or small-cap
- Classified under the same business sector
- International stocks
- Growth stocks
- Value stocks
- ESG stocks
Indeed, ETFs can be any classification discussed in this article and beyond. ETFs give investors instant diversification with a single buy-in.
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