Throughout history, investing in the stock market has been one of the most important ways to get ahead financially. As you learn more about stocks, you’ll often hear them talked about in terms of different types of stocks and how they are grouped. Here are the most important kinds of stocks you should know about.
Common Stock & Preferred Stock
Most of the stock people buy is called “common stock.” Shareholders of common stock have the right to get an equal share of the value of the company’s leftover assets if the company goes out of business. Shareholders of common shares could possibly make as much money as they want, but they could also lose everything if the company fails and has no assets left over.
Preferred stock works differently. It gives shareholders the right to get back a certain amount of money before regular shareholders do if the company goes out of business. Preferred owners can also get dividend payouts before regular shareholders. As a result, preferred stock is often a better option than normal stock because it is more like fixed-income bonds. Most companies only sell common stock. This makes sense since that’s what most investors want to buy.
Large-cap, Mid-cap & Small-cap Stocks
The overall value of all of a stock’s shares, or its “market capitalization,” is another way to group stocks. Large-cap stocks are shares of the biggest companies by market value. Mid-cap and small-cap stocks are shares of smaller companies.
There is no clear line that divides these groups from one another. But one rule that is often used is that stocks with market capitalizations of $10 billion or more are considered large-caps, stocks with market capitalizations between $2 billion and $10 billion are considered mid-caps, and stocks with market capitalizations of less than $2 billion are considered small-caps.
Most people think of large-cap stocks as safer and more conservative investments. Mid-cap stocks and small-cap stocks, on the other hand, have more growth potential but are risky. But just because two companies are in the same group here doesn’t mean they are the same as investments or that they will do the same in the future.
Domestic Stocks & International Stocks
You can put stocks into groups based on where they are. Most investors look at where the company’s legal offices are to tell the difference between U.S. stocks and foreign stocks.
But it’s important to know that a stock’s regional group doesn’t always match where the company makes money. Philip Morris International (PM 0.09%), which is based in the U.S. but only sells its cigarettes and other goods outside the country, is a great example. Especially for big global firms, it can be hard to tell if a company is truly domestic or international based on how it does business and how much money it makes.
Growth Stocks & Value Stocks
Another way to group things shows the difference between the two popular ways to invest. Growth buyers usually look for businesses whose sales and income are growing quickly. Value buyers look for companies with shares that are cheap compared to their peers or to how much they used to cost.
Growth stock usually have a higher amount of risk, but the possible profits can be very good. Successful growth stocks have businesses that meet a strong and growing need among customers. This is especially true if their products and services are supported by long-term trends in society. But competition can be tough, and if competitors mess up a growing stock’s business, it can quickly fall out of favor. Even a slight growth slowdown can send prices down sharply because buyers worry that the long-term growth potential is going down.
On the other hand, people think of value stocks as safer purchases. Most of the time, they are mature, well-known companies that have already become stars in their fields and don’t have as much room to grow. But because their business plans are stable and have stood the test of time, they can be good options for people who want more price stability while still getting some of the benefits of stocks.
Dividend Stocks & Non-Dividend Stocks
Many stocks have regular dividends that are paid to their owners. Dividends are a good way for investors to make money, which is why dividend stocks are so popular in some trading groups. Technically, a company is a dividend stock if it pays even $0.001 per share.
But profits aren’t a requirement for stocks. Even stocks that don’t pay dividends can be good investments if their prices go up over time. Some of the world’s biggest companies don’t pay dividends, but in recent years, the trend has been for more stocks to pay dividends to their owners.
Dividend stocks are also called “income stocks” because most stocks pay out money in the form of payments. But “income stocks” can also mean shares of companies whose business models are more established and have fewer chances for growth in the long run. Income stocks are a favorite of people who are already retired or are close to it. They are great for conservative investors who need cash from their investments right now.
Cyclical Stocks & Non-Cyclical Stocks
National economies tend to grow and shrink in cycles, with times of wealth and times of hardship. Some businesses are more affected by big economic changes than others, so investors call them “cyclical stocks.”
Shares of companies in industries like manufacturing, travel, and luxury items are cyclical stocks, because when the economy is bad, people may not be able to make big purchases as quickly. When the economy is strong, on the other hand, a rush of demand can make these companies jump back up quickly.
Non-cyclical stocks, also called protective or long-term stocks, don’t have these big changes in demand. Grocery store groups are an example of non-cyclical stocks, since people still have to eat no matter how good or bad the market is. Cyclical stocks do better when the market is going up, while non-cyclical stocks do better when the market is going down.
Safe stocks are those whose share prices go up and down by a small amount compared to the rest of the stock market. Safe stocks, which are also called low-volatility stocks, are usually in businesses that aren’t as affected by changes in the economy. They also often pay dividends, which can make up for a drop in share prices during hard times.
Stocks Categorized By Sector
Stocks are often separated by the kind of business they are in. Stock market sectors are one of the most common types of basic groups.
- Communication Services: Phone, Internet, media, and leisure companies
- Consumer Discretionary includes stores, car companies, and hotel and food businesses.
- Consumer Staples are businesses that make food, drinks, tobacco, and home and personal items.
- Oil and gas research and production companies, pipeline companies, and gas station owners are all part of the energy industry.
- Financial: banks, mortgage lenders, insurance companies, and trading firms
- Insurance companies, drug and biotech companies, and makers of medical devices are all involved in healthcare.
- Industrial companies include airlines, defence, aerospace, construction, transportation, manufacturing, and railroads.
- Mining, forest goods, building materials, packing, and chemical companies are all types of materials.
- Real Estate — real estate investment trusts and real estate management and construction firms
- Hardware, software, chip, communications equipment, and IT services businesses are all part of technology.
- Utilities are businesses that provide electricity, natural gas, water, green energy, and more.
- ESG stocks
- ESG investing is a way of investing that focuses on the climate, society, and how the money is run. ESG principles don’t just look at whether a company makes money and grows its income over time; they also look at how it affects the environment, the rights of workers, customers, and shareholders.
Socially responsible investment, or SRI, is related to the rules that control ESG. Investors using SRI look at each stock to see if it fits their most important values. But ESG investment has a more positive side: it doesn’t just leave out companies that don’t pass key tests. Instead, it actively pushes people to invest in the companies that do things the best. There’s a lot of interest in this area because there’s proof that a clear commitment to ESG principles can help investors make more money.
Lastly, stock groups make decisions based on how good the stock seems to be. Blue Chip stocks are usually the best in the business world. They come from companies that are at the top of their fields and have good names. They don’t usually give the best returns, but buyers who don’t want to take as much risk like them because they are stable.
IPO stocks are shares of companies that just went public through their first public offering. Investors who want to get in on the ground floor of a potential business idea often get very excited about IPOs. But they can also be unstable, especially when people in the business world have different ideas about how they will grow and make money. After going public, a stock usually stays IPO for at least a year and sometimes for as long as two to four years.