There are numerous types of stocks, categorized by company characteristics, size, region, sector, and more. Equipped with an understanding of different stock types, an investor can start building a diversified portfolio. Though all stocks can experience volatility and potentially lose value, holding a mix of different types of shares can mitigate the risk of being too heavily invested in any one category.
An Overview Of Stocks
A stock represents a percentage of ownership in a publicly traded company. So essentially, investors can own small pieces or “shares” of companies.
Generating returns via the stock market can usually happen in one of two ways. First, the value of the stock can increase over time, something known as capital appreciation. The second is through dividend payments, where companies make cash payouts periodically to all owners of that company’s stock. Some people make investments based on a company’s ability to pay consistent dividends, or “income.” Utility and telephone companies often fit into this bucket.
When you own a stock, you hold equity (or ownership) in that company. That’s why stocks are sometimes referred to as equities. Each individual share represents an equal proportion of ownership. Owners of stocks are often referred to as stockholders or shareholders.
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Categories of Stocks
There are several ways that different stocks are categorized, which is important to know if you’re brushing up on the stock market basics. Stocks are also sometimes classified by styles of investing. These categories often have to do with how that company makes money and how the stock is valued. You may often hear this associated when discussing value vs. growth stocks.
Value Stocks
Value stocks are stocks that are considered to be trading below their actual worth, and are a key component in value investing. Investors hope that by buying companies that are priced below their “true” value, they can profit as the gap narrows over time.
Growth Stocks
Growth stocks are companies that are growing at a fast pace or those that are expected to continue growing at a faster rate than other stocks or competitors. Investors can encounter higher valuations in growth investing.
Common Stock
Common stock represents shares of ownership in a corporation. When an investor receives common shares, they are typically also granted voting rights to the company and can participate in shareholder voting processes — usually one vote for each share. For investors, it can be helpful to understand the differences between common versus preferred stock.
Preferred Stocks
Preferred stocks make regular dividend payments, but holders of preferred shares often have zero or limited voting rights. If a company becomes financially insolvent however, preferred stockholders have a claim on assets before common shareholders do.
Exchange-traded Funds (ETFs)
Exchange-traded funds, or ETFs, group multiple securities into a single share. For instance, a stock ETF will hold numerous companies, while a bond ETF can hold many individual bonds, whether it’s a collection of Treasurys or high-yield debt. ETFs are popular because of the cheap, instant diversification they offer.
There are many types of ETFs, too, including low cost ETFs, and ETFs with their holdings concentrated in certain sectors.
Initial Public Offerings (IPOs)
An initial public offering (IPO) is the process of a private company listing and debuting on a public stock exchange. Investors can buy IPO shares on their first day of trading.
Special Purpose Acquisition Companies (SPACs)
SPACs are shell companies that go public on the stock exchange, and then try to find a private operating business to purchase.
Real Estate Investment Trusts (REITs)
REITs are companies that own and operate real estate, usually focusing on one type of property, such as warehouses, hotels or office buildings. There are pros & cons to investing in REITs. For example, one pro is that they tend to pay consistent dividends. Cons include sensitivity to interest rates, and taxed dividends.
Blue-Chip Stocks
Blue-chip stocks are stocks that large, well-established companies issue and usually have a long-standing history of growth. They’re generally considered to be financially sound, and may be considered lower-risk than other stocks.
Cyclical and Non-Cyclical Stocks
Cyclical investing concerns making stock selections surrounding economic changes, and cyclical stocks are those that may see their performance closely align with larger economic shifts. Non-cyclical stocks, on the other hand, do not see their performance tied to larger economic changes.
Defensive Stocks
Defensive stocks may be used as a part of a defensive investing strategy, and usually involves investing in stocks that may be seen as lower-risk. This can include blue-chip stocks, or stocks from sectories like utilities and consumer staples.
Penny Stocks
Penny stocks are low-priced stocks that generally trade for less than $5 per share, and many trade for less than $1. They’re usually risky, and highly-speculative stocks.
Income Stocks
Income stocks are a category of stocks that tend to offer regular, steady income to investors. That income generally comes in the form of dividends.
Environmental, Social, and Corporate Governance (ESG)
ESG stocks are those that may have certain non-financial criteria that appeal to certain investors. ESG stocks are shares of companies that are socially and environmentally responsible, though there is no universally-shared or accepted set of ESG criteria.
Different Market Caps
The sizes of stocks are classified by the market capitalization of the company’s publicly traded stock. Market cap is calculated by multiplying the stock price by the total number of outstanding shares.
Generally speaking, larger companies tend to be older, more established, and have greater international exposure — so a higher percentage of a large-cap company’s revenue comes from overseas. Meanwhile, smaller-cap stocks tend to be newer, less established and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.
Similarly, if you’re interested in buying mid-cap stocks, that means you’re investing in mid-sized companies — generally speaking.
While the market-caps that determine which companies are small or large can shift, here’s a breakdown that gives some rough parameters.
Micro-Cap: $50 million to $300 million
Small-Cap: $300 million to $2 billion
Mid-Cap: $2 billion to $10 billion
Large-Cap: $10 billion or higher
Mega-Cap: $200 billion or higher
Types of Stock Classes
There are also stock classes that investors should be aware of, and those generally involve Class A, Class B, and Class C shares, which all may be issued by the same company. The specifics of each category will vary from company to company, too.
For some rough guidelines, though, Class A shares tend to have more voting power and higher priority for dividends. Class B shares may have lesser voting power than Class A shares, but no preferential treatment for dividends. Class C shares are often given to employees as a part of a compensation package, and may have associated trading restrictions.
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Stocks By Sector
Additionally, stocks are often grouped by the industry that that company works within. According to the Global Industry Classification Standard (GICS), there are 11 recognized sectors, with numerous industries within those sectors. They include (but are not limited to):
Energy: Energy equipment and services, oil, gas, and consumable fuels. If you want to invest in energy stocks, this is the category to look at.
Materials: Chemicals, construction materials, containers and packaging, metals and mining
Industrials: Aerospace and defense, building products, machinery, construction and engineering, electrical equipment, industrial conglomerates
Consumer Discretionary: Automobiles, automobile components, household durables, leisure products
Consumer Staples: Food products, beverage, tobacco, household products
Health Care: Health care equipment and services, pharmaceuticals, biotechnology, life sciences
Financials: Banks, insurance, consumer finance, capital markets, financial services
Information Technology: IT services, software, communications equipment
Communication Services: Diversified telecommunication services, media, entertainment
Utilities: Electric utilities, gas utilities, water utilities, independent power and renewable electricity producers
Real Estate: Real estate management and development, various REITs (retail, residential, office, etc.)
Again, these categories can be helpful to investors looking to diversify their portfolios. If you want to add some real estate stocks, or even invest in tech stocks, sector investing may be something to research further.
Note, too, that there may be other categories or sectors of stocks not listed above, such as retail stocks.
Stocks by Country
Different overseas stocks can be classified by the country or region in which they’re headquartered, even if the company’s operations are global. Individuals looking to invest in international stocks have found that they can do so easily with ETFs, which hold numerous foreign companies within a single share.
Regions that are commonly used in the world of stock investing are:
EAFE is an acronym which stands for Europe, Australasia, and the Far East. Investors may see this used when making investment choices, as the MSCI EAFE is a common index used for international stock funds. These countries are all “developed” nations, which means they have established financial markets, stable political climates, and mature economies.
Emerging-market stocks, which stocks with companies based out of countries whose economies are described as developing. Brazil, Russia, Mexico, China, and India are just a few emerging markets. Emerging markets may be riskier to invest in but may pose an opportunity for high rates of growth.
The Takeaway
There are numerous types of stocks on the market, and it can be important for investors to understand the differences between them. The stock market can be volatile and prone to dramatic declines, but in order to shield themselves from the risks, investors often create diversified portfolios by stocking their holdings through various different stock types.
Diversification is easier to do if an investor understands the different types of stocks that exist in the U.S. equity market. From mega-cap stocks to ETFs to emerging-market companies, there are a myriad of investing opportunities in the equity market.
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FAQ
What are the benefits of investing in different types of stocks?
Investing in different types of stocks can be beneficial to investors as it can diversify their portfolio, which may help reduce investing risk as the market fluctuates.
What is the riskiest type of stock?
Penny stocks are likely the riskiest type of stock, as they are shares of companies that are new, unproven, and highly volatile. While there’s a big potential upside to investing in penny stocks, the risks are significant.
What stocks are best for beginners?
While it’ll depend on the individual investor, beginner investors may want to look at investing in blue chip stocks, ETFs, or other stocks that have either built-in diversification, or a long track record of viability, which can be a sign of lower associated risks.
What are the risks and opportunities of investing in emerging markets?
Emerging markets can be volatile or unstable, and there may be political, monetary, and economic risks that investors are unaware of in those markets.
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