Stocks are the most essential ingredient in any investment portfolio, but not all stocks are identical. What are the different types of stocks? Understanding the difference between common stocks and blue chips can help you make better decisions about your investments, so we’ve provided this helpful guide to different types of stocks.
There are many types of widely available stocks. To help you compare them, we’ve grouped some together in the guide below.
What are the different types of stocks? Let’s start with the most familiar. Common stocks are one of the most widespread types of stocks to invest in.
The market for common stocks allows you to purchase shares of a company, which represents partial ownership. Market value of these shares rises with the company’s success, which basically gives you unlimited earning potential, provided the company continues to grow.
Preferred stocks give preferred shareholders preferential treatment if the company offers dividend payments or if the company dissolves.
The flip side is that preferred shareholders do not have any voting rights, which means they have less control over the company. Some companies allow you to convert preferred stock into common stock, and others only offer common stock.
As you might guess from the name, growth stocks represent companies that are expanding their revenues or investing in their company in a way that analysts believe will lead to greater earnings than the rest of the market.
Growth stocks provide investors with greater profit potential, though with greater risk. Since these companies are investing their profits back into their business, growth stocks typically do not pay dividends.
Value stocks are companies that are “on sale,” so to speak. More specifically, these stocks represent companies that are being underpriced by the stock market.
For some investors, value stocks hold strategic importance since you can buy shares at a “value” price and reap the profits when the rest of the market awakens to the company’s true value.
International stocks represent companies from outside the United States, while domestic stocks are shares of companies from within.
For some investors, international stocks can be one of the better types of stocks to invest in since these companies are not impacted by the same market forces as American corporations. They can help you achieve greater diversity in your portfolio and can provide some protection if the U.S. stock market should take a downturn.
Stocks may also be classified based on market capitalization, which refers to the total value of all of the company’s shares. What are the types of stocks represented by large, small, and mid-cap stocks? There’s actually no firm rule, but customarily these stocks are divided as follows:
- Large-Cap Stocks: $10 billion or more
- Mid-Cap Stocks: $2 to $10 billion
- Small-Cap Stocks: $2 billion or less
While these divisions are helpful, keep in mind that they tell you very little about the company overall.
For instance, two companies can both be classified as large-cap stocks despite occupying different industries or having completely different growth potential. When looking at different types of stocks to trade, you’ll need to look at a broader set of data than market capitalization.
Some companies take a portion of their profits and return it to their shareholders, almost as a kind of bonus check. These payments are known as “dividends,” and while their value varies, they can serve as a form of passive income for investors.
The nature of these dividend payments can vary widely, so each company should be investigated prior to investing in dividend stocks. For instance, some companies allow shareholders to reinvest their dividends back into the company through a dividend reinvestment program (DRIP).
Occasionally you may hear the phrase “non-dividend stocks,” though this term is simply used to differentiate between stocks that pay dividends from those that don’t.
Technically, “income stock” is simply another way to refer to stocks that pay dividends. But income stocks are generally those that lack long-term growth potential yet have the stability to pay dividends to their shareholders.
This arrangement means that investors can receive passive income with minimal risk, making income stocks ideal for conservative investors or those nearing retirement.
Blue chips stocks represent another form of dividend stocks. What makes a blue chips stock distinct? Definitions are somewhat fuzzy, but blue chips stocks tend to share some basic characteristics:
- They come from well-known, large-cap companies
- They have a long history of strong performance
- They have a history of steady earnings and high dividend potential
You may also notice that since these companies are larger and well-established, their individual share prices can be slightly higher than other companies.
Certain industries see patterns of growth and plateaus, following certain cycles of the year or the U.S. economy. These are known as “cyclical stocks.” What are the types of stocks that follow a cyclical pattern? Common examples include:
- Luxury goods
In some cases, the cycle is driven by seasonal considerations, while in others, the business cycle is driven by economic downturns that can be harder to predict.
By contrast, non-cyclical stocks come from companies that don’t see major swings in consumer demand. These are sometimes called “defensive stocks” since they offer greater stability than other investments.
Consumer staples stocks (food, grocery chains, etc.) tend to be non-cyclical. One recent poll indicated that 90% of consumers planned on buying the same basic products regardless of inflation. Defensive stocks can help you weather a volatile economy without the risk associated with cyclical industries.
Safe stocks are similar to non-cyclical, or defensive stocks, in that they represent companies or industries that aren’t subject to changing market conditions. For this reason, safe stocks are also commonly called “low-volatility stocks.”
On the one hand, this means that safe stocks don’t offer much opportunity for rapid growth. But low-volatility stocks may still be useful for those who want to stabilize their portfolio or simply pursue steady, long-term growth.
ESG stocks represent companies that have adopted environmental/social/governance (ESG) practices, meaning they place considerable value on environmental sustainability and business ethics.
While this has little to do with their overall profitability, polls show that 70% of investors prefer to sink their money into companies that share their personal values.
Penny stocks have a mixed reputation. On the one hand, shares can be priced under $1.00, with few stocks climbing to more than $5.00 per share.
But “penny stock” usually refers to companies that are risky or speculative investments. Penny stocks often represent companies in a state of pronounced decline. In some cases, penny stocks can be used to scam investors from their money.
You won’t find penny stocks on major stock exchanges but instead traded at smaller, over-the-counter traders. Buyer beware.
Now that you’ve learned more about these types of common stocks, you may be wondering which is best for your portfolio. Ultimately, it comes down to your goals and strategy. Are you looking for short-term gains, or are you more interested in steady growth over time?
Regardless of your goals, your strategy should also include careful research. We can help with that. At Gorilla Trades, members get access to more great content just like this article, as well as other educational and investment tools to help you build and monitor your portfolio.
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