By Edward Zhao
If you’re planning to begin your investing career in stocks, it is important to note the different types of stocks that are available and understand if they are suitable for you. Stock types are categorized through different attributes such as company size, industry, geographic location, and style. Knowing the characteristics of each of the various stock categories is essential for:
Selecting the correct stock for personal financial goals
More efficient trading by sifting through different stock labels
Reducing portfolio risk by making more informed decisions
Taking risk appetite and voting rights into consideration
What are the different category types of stocks?
Common v. Preferred Stock:
When most people invest, they invest in common stock or ordinary shares, which represent partial ownership of a company and pay investors profits in dividends. Being the most basic stock type, the majority of stocks issued by companies are common stock. Furthermore, through voting rights, common stockholders can elect a company’s board of directors as well as vote on company policies.
Preferred stock or preference shares, on the other hand, offer some advantages and disadvantages over common stock. While all public companies have common stock, only a handful issue preferred stock. Though preferred stock does not carry voting rights, it is a great way to earn passive income: Preferred shareholders receive payments before dividends are issued to common shareholders and also are repaid first if the company enters bankruptcy or liquidation.
Growth v. Value Stock:
Growth stocks are issued from companies that are expanding their revenues, profits, and share prices at a greater rate than the market. (e.g. Apple Inc.) Typically, growth stocks are from young companies and industries that are rapidly expanding but can also be from already existing ones that are poised for expansion for a variety of reasons. Normally, growth stocks will outperform during these times of expansion and when interest rates are low.
Value stocks, on the contrary, are shares of strong companies that are being underpriced by the stock market, or traded at a discount. (e.g. Bank of America Corp.) Value investors buy these stocks at low prices given their history and market share, and believe that they are worth more than the current price, planning to sell these stocks when they reach their “true value.” Financial, healthcare, and energy name-value stocks tend to have higher growth during periods of economic recovery and are sources of reliable income streams.
Domestic v. International Stock:
As the name implies, stocks can also be divided into both domestic (e.g. Ford Motor Company) and international stocks (e.g. Deutsche Bank AG), which are designated by the company’s head office location. While domestic stocks are local and in your home country, international stocks are shares from companies outside your home country. There are numerous benefits in investing in international stock: it can provide extra diversification through different market forces as well as give investors access to faster-growing economies with different risk/return patterns.
Cyclical v. Non-Cyclical Stock:
Cyclical stocks are shares that are directly impacted by the economy, where they typically follow economic cycles of expansion, peak, recession, and recovery. (e.g. Restaurants, High-end Clothing Retailers, Automobile Manufacturers) When an economy is growing out of a recession and into a boom, cyclical share prices tend to surge. On the other hand, when the economy is slowing down into a bust, share prices usually fall, and sales contract. As a result, cyclical stocks normally are more volatile and can outperform non-cyclical stocks during times of economic expansion and growth.
Also referred to as defensive stocks, non-cyclical stocks are shares of companies whose businesses are less impacted by the volatility of the economy. (e.g. Healthcare, Utilities, Food) They tend to perform well without influence from the economy, which allows them to be “recession-proof” and outperform cyclical stocks during an economic downturn.
Large-Cap v. Mid-Cap v. Small-Cap Stock (Company Size):
Outside of the different types of stocks issued by companies, stocks can also be classified under the company size through market capitalization. Market cap is determined by a measure of value resulting from multiplying the total number of a company’s outstanding shares by its current stock price.
Large-Cap stocks are identified as stocks issued by companies in the United States with a market capitalization of $10 billion or more. (e.g. Google) Due to their enormous size and influence over markets, Large-Cap stocks offer investors less risk and greater stability.
Mid-Cap stocks are categorized under companies with a market capitalization between $2 billion and $10 billion. (e.g. First Solar) These companies are usually future large-cap companies or ones that have declined from that status. Investing in these stocks combines the benefits of stability from Large-Cap companies and greater potential growth from Small-Cap companies.
Small-Cap stocks are issued under companies with a market capitalization of $300 million to $2 billion. (e.g. Rite Aid Corp.) Out of all the different company-size stocks, Small-Cap stocks are the majority and most common. With heightened market volatility, these stocks offer investors great opportunities for growth, but at the same time, are the riskiest stocks to invest in. Small-Cap stocks allow for the possibility of major gains or major losses.