Investing in stocks has notable advantages. However, doing so can be overwhelming for beginners and even those with no immersive background and experience as stock investors. There are too many options to choose from.
Aside from the nomenclature used to name the different types of stocks, these stocks can also be categorized based on their differentiating characteristics and features. This article lists and defines the different types of stocks according to different categories.
A Guide to the Different Types of Stocks
Based on Rights and Privileges
There are two major kinds or types of stocks based on rights and privileges afforded to their stockholders. These are common stocks and preferred stocks. The following are their respective definitions and distinctions:
• Common Stocks: These stocks represent ownership in a particular company, as well as residual claim to its current and future profits. Owning one grants holders the right to elect the board of directors of the issuing company and vote on corporate policies. However, because they also represent a residual claim, common stockholders are paid last after creditors, bondholders, and preferred stockholders.
• Preferred Stocks: These stocks also represent ownership in a particular company and preferential treatment over the distribution of profits, especially when it comes to the payment of dividends, as well as priority claims on assets in the event of liquidation after creditors and bondholders. However, unlike common stockholders, preferred stockholders have limited or no voting rights.
Both common stocks and preferred stocks can earn their holders dividends. However, not all common stocks have dividends while most preferred stocks are dividend-paying stocks. Remember that preferred stockholders have preferential treatment as regards the distribution of company profits over common stockholders.
Common stocks can be classified further into so-called share classes such as Class A common stocks and Class B Common stocks. These classes have different levels of voting rights. There are also different types of preferred stocks such as preferential preferred stocks and cumulative preferred stocks. Each has its unique features and benefits.
Based on Market Capitalization
Stocks are also categorized by the size of the issuing companies as determined by their respective market capitalization. Note that market capitalization is calculated by multiplying the total number of shares by the present stock or share price. Take note of the following types of stocks based on market capitalization:
• Small-Cap Stocks: Stocks from companies with an individual market capitalization of between $300 million and $2 billion. Note that the figure varies depending on the geographical market. Companies that trade these stocks are either up-and-coming organizations or have remained relatively small. These stocks are ideal for aggressive investors because they are riskier than mid-cap and large-cap stocks.
• Mid-Cap Stocks: Stocks from mid-sized companies whose market capitalization is between $2 billion and $10 billion. They fall between small-cap stocks and large-cap stocks but they are considered aggressive stocks similar to small-cap stocks but less aggressive or riskier than large-cap stocks.
• Large-Cap Stocks: Stocks from companies with a market value or market capitalization of more than $10 billion. The figure also varies depending on the geographical market. These stocks are less volatile than small-cap and mid-cap stocks, especially during market uncertainties. They are ideal for stock investors who want to minimize their risks while prioritizing quality and stability over immediate gains.
• Penny Stocks: Stocks from smaller companies with very low to zero liquidity. These stocks trade below $5.00 via over-the-counter markets and brokers. The trading volume is low and they are highly speculative and extremely risky. Penny stocks are ideal for highly aggressive and speculative investors.
Investing in small-cap stocks has advantages and disadvantages, as well as risks. The same is true for mid-cap stocks and large-cap stocks. As mentioned, small-cap and mid-cap stocks are riskier but have a higher potential for better returns. Large-cap stocks are more stable and have lower return potentials than small-cap and mid-cap stocks.
Based on Investing Strategy
Other types of stocks are labeled and categorized based on how well they are attuned to specific investment strategies. Take note of the following:
• Growth Stocks: Issued by companies whose income or revenues are growing faster than the market average. These stocks are ideal for investors who are seeking to accumulate wealth as quickly as possible through growth investing.
• Value Stocks: Traded at a lower price or are undervalued relative to their key metrics such as their fundamentals. Most high-yield stocks are value stocks. Investing in these stocks is the central element of value investing that involves picking stocks that seem to be trading for less than their intrinsic book value.
• Defensive Stocks: Usually provide stable dividends and price appreciation even during a market or economic downturn. Essentially, these stocks tend to weather through the instability and uncertainty in the stock market. They are part of a defensive investment strategy.
• Cyclical Stocks: Experience price fluctuations attuned with the boom-and-bust business cycle in the economy. For example, during the boom or expansion phase, the prices of these stocks tend to appreciate before depreciating during the bust or recession phase. They are fundamentally affected by economic conditions.
• Speculative Stocks: Characterized by high susceptibility to volatility with fundamentals that do not show apparent strength or sustainability. Some investors and traders hold these stocks to speculate because of their possibility for extreme returns.
Specific examples of growth stocks are tech companies such as Amazon and Alphabet. Identifying value stocks require a look at the fundamentals of prospective companies. Note that a particular company can be considered a growth stock, value stock, or both depending on its standing. On the other hand, examples of defensive stocks include utility companies, healthcare and other related organizations, and producers of consumer staples.