What Kind of Stocks Are There?

What Kind of Stocks Are There? The stock market is, without a doubt, a great place to make an investment of your money. Depending on your overall financial strategy, a stock market investment can help you prepare for retirement, keep ahead of inflation, or make money for short-term goals.

However, the stock market can unquestionably be extremely complicated. When investing, there are a variety of considerations to keep in mind. Chief among them are the different types of stocks. This is important: All stocks are absolutely not created equal, and there are critical differences in the stock market. 

Common vs. Preferred Stock

When purchasing stock in a company, there are actually two types of stock you can purchase: Common and Preferred. Both allow someone to own a small piece of the company. However, there are significant differences. 

Most of the time, you will purchase common stock. Common stock is the regular stock that you purchase through a broker or in a retail app. It allows owners of the stock to vote at company meetings on company decisions. It also allows an owner to collect dividends as they are announced by a company. Generally speaking, common stock does better than preferred stock. 

Preferred stock does not come with voting rights. As such, preferred stock owners may have less direct “control” over the company. However, preferred stock owners receive their dividends before common stock owners.

Furthermore, if a company goes bankrupt and liquidates its assets, the preferred stock owners get paid first. Preferred stock can usually be converted – in limited form – to common stock.  

Categories of Stock

When you buy a share of a company, you are essentially becoming a very small owner. However, different types of companies are appropriate for different types of investors, and these companies may help you meet different financial goals. They include: 

Growth Stocks

Growth stocks are the term given to stocks that you believe will appreciate in value over a set time period. More to the point, growth stocks are likely to outpace their sector or the market in general. These are often the so-called “unicorns” – the stocks that are likely to show a major rise in the next few years.

Examples of growth stocks are often stocks that have some sort of technological advantage that makes them likely to shoot up in value. They often have done very well with venture capital funds, succeeding in raising money from companies that make investments in these organizations.  

Growth stocks can be identified by multiple characteristics, including:

• A solid leadership team that is clearly committed to the company’s long-term success.
• Fast growing sales and/or profits.
• Disruptive innovation is a core tenet often of a growth stock
• Extensive buzz within the stock market.

Income Stocks

Income stocks are often used as side sources of income for individuals, or as cash for retirees or people on a fixed income.

These stocks pay dividends, meaning that they will regularly give shareholders a portion of their profits back. These profits come in the form of dividends.

The higher the dividend, the more money a shareholder receives. Of course, a dividend can’t be unsustainably high. The amount of the dividend is usually measured in a dividend yield, which is the percentage of a share price that is given as a dividend.

Income stocks are usually steady investments and tend to be enjoyed by more conservative investors who want to make sure that they can generate regular cash from their investments. They are not likely to show extensive growth. However, they still fit an investor’s portfolio. Common sectors that offer dividends include utilities and real estate investment trusts (REITs). 

Value Stocks

Value stocks are stocks that are believed to be “cheap.” This doesn’t mean that they have a low share price. Instead, it means that they have a low Price/Earnings (PE) ratio or some other valuation metric.

For example, the lower a PE ratio, the cheaper a stock is considered. A PE ratio measures the price of a stock against the earnings of the stock.

A lower PE means you are paying less money for higher earnings. This is indicative of a value stock. To be clear, a low PE is not necessarily indicative of a good company. In fact, it may show that a stock has low earnings or a depressed share price for other reasons. As such, you’ll need to do a more extensive analysis. 

Value stocks can come as growth or income stocks. As a result, you can find value stocks in numerous forms. Some of the most famous investors of the world – like Warren Buffett – are known for their ability to find value stocks and hold them until they become popular again. 

Blue-chip Stocks

Blue-chip stocks usually refer to the most “prestigious” companies on the stock market. This means that they are old and well-established companies with a long track record of success.

They are also usually industry leaders and have likely been so for some time. Blue-chip stocks have usually been around long enough that they also pay dividends, thus providing shareholders with an additional incentive for investment

Blue-chip stocks are usually safe investments. They are likely to grow and extremely unlikely to lose their value and cost their shareholders their investment. There are never any guarantees, of course, but these investments are typically extremely useful ones for individuals looking for more balance, less risk, and increased income preservation in their stock portfolio. Examples of blue-chip stocks include Coca-Cola, Apple, or Disney. 

Market Capitalization

Market Capitalization refers to the total value of a stock. This is a function of both the amount of shares in existence and the share price of the stock. When the share price increases, or when the company issues more stock, the market capitalization increases. 

As this rough mathematical formula would imply, a stock that performs well – and thus has a higher share price – will have a higher market capitalization.

A rough metric of a company’s long-term success and profitability can be seen in its market capitalization. However, this should not be used instead of other metrics, including a stock’s fundamentals or technical analysis. Indeed, market capitalization can be misleading. As the old stock axiom goes, past performance is not a guarantee of future results. 

Market Capitalization generally falls into one of a series of categories:

• Small-cap: $300 million – $2 billion
• Medium cap: $2 billion – $10 billion
• Large-cap: $10 billion or more

Larger capitalization companies may be more mature and represent more reliable, stable profit streams. It is unlikely that these companies will abruptly cease to exist (though it is always possible!).

Small or medium cap companies may be on an upward trajectory and represent growth opportunities. However, as these companies are less well established, investing in smaller companies may represent a risk for your investment portfolio. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.