The stock market is a complex and multi-faceted place, and there are a number of different ways you can trade stocks as well as a number of different types of stocks. It’s important to be well-informed before you start trading on the stock market, so here are the basics on every type of stock you are likely to encounter in your trading endeavours.
If you want to learn more about the 11 different sectors each stock can be a part of, you can check out our blog post on stock sectors here.
Common and preferred stock
Common stock is, as the name suggests, the most common form of stock traded on the stock market- it is a security that represents partial ownership in a company, with shareholders getting the right to receive a proportional share of the value of any remaining assets if the company dissolves (after bondholders, preferred shareholders, and other debt holders are paid in full). Many companies will exclusively offer common stock.
With preferred stock, shareholders have priority over a company’s income, which means in the case of a company’s liquidation they are paid dividends before common shareholders. However, preferred stock comes with no voting rights, so preferred shareholders have no voice in the future of the company when it comes time to elect a board of directors or vote on corporate policy. These factors mean that as an investment, preferred stock often more closely resembles fixed-income bond investments than regular common stock.
Cyclical and non-cyclical stocks
A cyclical stock is one with a price that is affected by systematic or macroeconomic changes in the overall economy, following the cycles of an economy through expansion, peak, recession, and recovery. Due to their exposure to the cycles of the economy, cyclical stocks usually have higher volatility, and are expected to produce higher returns during periods of economic strength.
By contrast, non-cyclical stocks, also known as defensive stocks, are typically unaffected by economic trends. These encompass goods and services that are always in demand and people always need regardless of the state of the economy, such as food, gas and water. As a result of this resistance against market trends, non-cyclical stocks are less volatile and tend to perform better during market downturns.
Dividend and non-dividend stocks
Dividend stocks, also known as income stocks, distribute a portion of the company’s earnings, or “dividend payments,” to investors on a regular basis. Dividends provide valuable income for investors, which makes dividend stocks highly sought after in certain investment circles. Most dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, allowing investors to build a cash stream much like an annuity. Companies that pay dividends tend to be well-established, so dividend stocks can add stability to your portfolio.
While non-dividend stocks are less common in recent years, companies that don’t pay dividends to investors can still be useful investments if their stock prices increase over time. A company can also use any money not paid in dividends to generate new profits and increase long-term value to its shareholders.
Domestic and international stocks
Domestic stocks and international stocks are exactly what their names suggest- domestic stocks are located wherever you call home, and international stocks are based in other countries. You can usually tell where a stock is located from the company’s official headquarters.
However, it’s important to understand that a stock’s geographical category doesn’t always correspond to where the company gets its sales. It can sometimes be hard to tell from business operations and financial metrics whether a company is truly domestic or international, particularly with large multinational corporations.
“ESG” stands for “environmental, social and governance,” and ESG investing is an investment philosophy that puts emphasis on these three factors. ESG investing principles consider collateral impacts on the environment, company employees, customers, and shareholder rights rather than focusing entirely on whether a company generates profit and is growing its revenue over time, excluding companies that neglect these collateral impacts and encouraging investment in companies that work with the environment, society and governance in mind.
Growth and value stocks
Growth stocks are investments in companies that are anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends, as the issuers of growth stocks are usually companies that want to reinvest the earnings they accrue in order to accelerate short-term growth.
In contrast, value stocks are classified as investments in companies that are currently trading below what they are really worth, and will thus theoretically provide a superior return. These stocks are usually more conversative investments, made in more mature, well-known companies that have already grown into industry leaders and therefore don’t have as much room left to expand further.
An IPO stock is an investment made in a company that has recently gone public through an initial public offering (IPO). A stock typically retains its status as an IPO stock for at least a year, and for as long as two to four years, after it becomes public.
IPOs can generate a lot of excitement among investors looking to get in on the ground floor of a promising business concept, but they can also be more volatile, particularly when there is disagreement within the investment community about their profit or growth prospects.
Large-cap, mid-cap and small-cap stocks
Stocks can be categorised by the total worth of all their shares, which is called market capitalisation; companies with the biggest market capitalisations are called large-cap stocks, with mid-cap and small-cap stocks representing successively smaller companies.
Large-cap corporations—those with market capitalizations of $10bn and greater—typically grow more slowly than mid-cap companies. Mid-cap companies are those with capitalization between $2-10bn, while small-cap corporations have between $300m and $2bn. Large-cap stocks are generally considered safer and more conservative investments, while mid-cap and small-cap stocks have greater potential for future growth but are riskier.
Penny and blue chip stocks
Penny and blue chip stocks are stocks that categorise companies based on perceived quality. Blue chip stocks are investments in companies that lead their respective industries and have strong reputations, offering low volatility, large market caps and strong returns (although not necessarily the strongest). The stability offered by blue chip stocks makes them valuable prospects for investors averse to risk.
By contrast, penny stocks are investments made in low-quality companies with typically inexpensive stock prices. Where blue chip investors bank on their chosen companies having consistent levels of success, investors in penny stocks count on the company making a turnaround, so they can get a return on the money. While investing in penny stocks should be done carefully- more often than not, they are inexpensive for a reason- there is potential for these companies to grow, although investing in this potential should be tempered by careful research and money management techniques, as well as self-evaluation.