What Are The Different Types of Stocks Available to Investors?
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For new (and even veteran) investors, the sheer variety of available investment vehicles can be overwhelming. While most investors may know the basics related to stocks, bonds, and even exchange-traded funds (ETFs) or mutual funds, it can be easy to find yourself in the weeds when exploring deeper into the different types of stocks available to invest in.
Make no mistake: there are probably a lot more different types of stocks than you ever thought possible. That is especially true for those who maybe only invest through their retirement accounts, or who invest using index funds or ETFs. For instance, you may have never heard of preferred stock or mid-cap stock โ even though theyโre relatively common.
The average investor may not necessarily need to know the ins and outs of every specific type of stock out there, either, but it can be beneficial to know what categories exist to help you make better decisions, gauge how much risk youโre taking, and even try to get a grasp on whether you can expect extra income from your holdings through dividends. Thatโs why having some cursory knowledge of different types of stock is important.
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But before getting into the numerous types of stocks that investors can choose from, it can be helpful to get a quick overview of what, exactly, a stock is, and is not.
A stock, or share, represents ownership in a publicly-traded company or firm. In other words, if you own one share of Company A, you own a very small percentage of the company. That often entitles you to certain things, such as dividends โ or, cash payouts that result from the companyโs overall profitability โ and voting rights.
But not all stocks are the same, and they donโt all offer the same perks. Some companies even have multiple types of stock. For instance, Google (or Alphabet) has Class A, Class B, and Class C stock. They may trade under different tickers, such as GOOGL and GOOG, and have different voting rights.
Generally, stocks can typically be categorized in one of two ways, too: Common stock, or preferred stock. Within those two categories, many other types of stocks also exist. Weโll run through some of the most common types of stock, and what makes them unique compared to others, below.
Here is a non-exhaustive list of some of the more common types of stock on the market.
As mentioned, the main types of stock are common and preferred stock. Common stock is something like version 1.0 of stock โ itโs often called ordinary stock or ordinary shares, too. Itโs the most basic type of stock that there is, and entitles shareholders to voting rights and often, dividends.
Preferred stock, the other main type of stock, doesnโt typically grant shareholders voting rights, which is perhaps the most important distinction between preferred versus common stock. Preferred stock does, however, usually give shareholders dividend distributions โ and preferred stockholders may even get priority over common stockholders when dividends are doled out, and if or when a company goes belly-up and its assets are liquidated.
Hence, those shareholders are โpreferredโ over common stockholders.
Preferred stock may also have some characteristics of bonds. They may, for example, have fixed maturity dates, when reached, sees the initial investment returned to the shareholder. Another important thing to keep in mind is that preferred stocks may not see as much appreciation as common stock โ a potential downside for many investors.
There are also size-related stocks on the market, including large, mid, and small-cap stocks. โCap,โ in this sense, refers to market capitalization, and the corresponding market capitalization of the underlying company for a given stock.
So, large-cap stocks refer to common stocks of relatively large companies. Usually, a โlargeโ capitalization for purposes of identifying large-cap stocks means a market capitalization of at least $10 billion. Some examples of large-cap stocks could include Microsoft (MSFT), Apple, (AAPL), ExxonMobil (XOM), Walmart (WMT), and Coca-Cola (KO).
Mid-cap stocks are shares of companies with mid-level market capitalizations, typically between $2 billion and $10 billion. Examples of mid-cap stocks could include Under Armour (UAA), Foot Locker (FL), Fair Isaac Corporation (FICO), Chewy (CHWY), and DocuSign (DOCU).
Small-cap stocks are โ you guessed it โ companies with relatively small market capitalizations, usually under $2 billion. There are a multitude of small-cap stocks on the market, as most companies donโt climb to market capitalizations of more than $2 billion, let alone $10 billion.
A growth stock is called such because itโs primed for growth. Or, in other words, they are stocks that are expected to provide high returns because the companies are on a growth trajectory. But they can be riskier than other stocks, as they may be overvalued by the market. Many tech stocks in recent years may have been considered growth stocks.
A value stock is, in effect, the opposite of a growth stock. Value stocks are, for lack of a better term, a value for investors, as they may be undervalued by the market because a company may not be as new or exciting as a firm in growth mode. Value stocks are and have been a favorite of famed investors like Warren Buffett over the years.
International stocks are shares of companies that are not based in the U.S. They can be used to diversify a portfolio or gain exposure to foreign economies, which may expect faster growth than the U.S., and thus, generate higher potential returns for investors.
Blue-chip stocks are shares of big, well-known companies with established histories of growth and profitability. That may include aforementioned companies like Coca-Cola or Microsoft, which are both large-cap and blue-chip stocks.
Income stocks are called such because they drive income for shareholders, usually through relatively high dividend distributions. Income stocks tend to be low-risk investments that offer steady, regular income streams for investors, even if they donโt usually see high amounts of appreciation in terms of share price. Income stocks could include shares of utility companies, telecom companies, real estate firms, or even waste management companies.
The different types of stocks listed above do not comprise an exhaustive list, but should give you a basic idea of how many different silos or categories into which stocks can be classified. Some stocks straddle the line, or can be considered as multiple types of stocks (both a blue-chip and large-cap stock, for example).
But when it comes to determining what stocks are right for you and your portfolio, itโll depend on your individual investing strategy, your risk tolerance, and the resources you have available to you to invest โ specifically, capital and time. It may be best to get in touch with a financial professional to help you put a plan together, and select some stocks to build your portfolio. Tools like Playbook can also be helpful when determining the best path forward as it relates to your finances.
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Again: There are thousands and thousands of potential investments on the market, and theyโre not all created equal. But knowing a little about the different types of stocks out there can help you parse out which specific stocks best fit your strategy and portfolio.
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