Investing in the stock market can provide lucrative returns. But stocks can be a complicated subject. Did you know that there are many different types of stock?
From Blue-Chip Stocks to Growth stocks to Cyclical stocks, each one has its own unique characteristics and carries a different level of risk. If you’re thinking about investing in stocks, it’s important to understand what the different types are.
To help you with this, we’ve written this guide. It lists all the major stocks and gives an explanation of each one, so you can make better-informed decisions about your investments and reduce risk within your portfolio.
What are the different types of stocks?
If you’re considering investing, some of the major stocks to know about are Blue-Chip Stocks, Class A Stock, Class B Stock, Class C Stock, Common Stock, Preferred Stock, Cyclical Stocks, Non-Cyclical Stocks, Defensive Stocks, Dividend Stocks, Non-Dividend Stocks and Domestic Stocks.
The other main stocks to be aware of are International Stocks, ESG Stocks, Growth Stocks, Value Stocks, Income Stocks, IPO Stocks, Large-Cap Stocks, Mid-Cap Stocks, Small-Cap Stocks, Penny Stocks and Safe Stocks.
Read on for an explanation of each of these different types of stocks.
Different types of stocks explained
Blue-Chip Stocks
These types of stocks are shares of well-known, market-leading companies with strong reputations.
They have a long and successful track record of steady earnings and consistent dividend payouts, and while they don’t usually provide the highest returns, their stability means they’re suited to investors who have a low tolerance for risk. This also makes them popular during periods of uncertainty.
As well as being unlikely to experience spectacular growth, Blue-Chip Stocks cost more to buy, due to the fact that the companies are so well-established.
Some examples of Blue-Chip Stocks are:
- Exxon Mobil Corporation (XOM)
- McDonald’s Corporation (MCD)
- Microsoft Corporation (MSFT)
Class A Stock, Class B Stock and Class C Stock
In order to grant key investors more control, some companies issue multiple classes of stock, such as Class A Stock, Class B Stock and Class C Stock.
An example of this would be a company only issuing Class A Stock to key executives or company founders, while Class B Stock is what would be available to the general public. This means that if Class A Stock has more voting power than Class B stock, insiders will have more control over the company’s affairs.
This is the case for Google’s parent company, Alphabet Inc (GOOGL). Alphabet’s Class A Stock carries one vote per person, its Class B Stock carries ten votes per share and is held by Google’s original founders and early investors, and the company’s Class C Stock carries no voting rights.
Common Stock and Preferred Stock
Also known as “Ordinary Shares”, Common Stock is the most basic type of stock and is what the majority of people invest in.
Investors will be entitled to generated profits — which are typically paid in dividends — and usually have the right to vote on board members and corporate policies. However, it is also possible to have non-voting Common Stock.
Stockholders will also have rights to a company’s assets in the event of liquidation — but only once holders of Preferred Stock and other debt holders have been paid. This means that while shareholders can benefit from unlimited rewards if the company is doing well, they also risk losing everything if the company is dissolved and there are no assets left over.
All public companies have Common Stock, however only some issue shares of Preferred Stock.
This type of stock may not provide voting rights and the issuing company can buy back Preferred Stock if it wants to, but investors do receive regular dividend payments before Common Stock shareholders do. And, as mentioned above, they also get preference over Common Stock shareholders if the company becomes insolvent. Additionally, shareholders can convert their Preferred Stock to Common Stock if they wish.
Cyclical Stocks and Non-Cyclical Stocks
Directly affected by the performance of the economy, Cyclical Stocks tend to follow economic cycles of expansion, peak, recession and recovery.
While they usually outperform other stocks in times of economic strength, they are much more volatile and can significantly reduce in value when the economy collapses.
They operate in industries such as luxury goods, manufacturing and travel because consumers are less able to make big purchases in times of economic crisis.
Here are some examples of Cyclical Stocks:
- Apple Inc (APPL)
- Nike Inc (NKE)
Non-Cyclical Stocks, on the other hand, are available in recession-proof industries, like supermarket chains, which perform relatively well regardless of how the economy is behaving.
These types of stocks usually outperform Cyclical Stocks in an economic downturn, as demand for essential goods remains more or less consistent.
Defensive Stocks
Like Non-Cyclical Stocks, Defensive Stocks are available from companies that sell essential goods and services, such as healthcare, consumer staples and utilities. Again, this means they provide consistent returns no matter the state of the economy.
A Defensive Stock can also be a Blue-Chip Stock, Income Stock, Non-Cyclical Stock or Value Stock.
Some examples of Defensive Stocks include:
- AT&T Inc (T)
- Cardinal Health (CAH)
Dividend Stocks and Non-Dividend Stocks
Many stocks make regular dividend payments to their shareholders, which means they’re highly sought after by investors who rely on stocks for their income.
These types of stocks can offer tax benefits, as most are taxed at the same rate as long-term capital gains instead of ordinary income.
Not all stocks pay dividends, but Non-Dividend Stocks can still be lucrative if their prices increase over time.
Domestic Stocks and International Stocks
Stocks can also be put into different categories based on where the company’s official headquarters is located.
Domestic Stocks are shares of companies from inside an investor’s home country, whereas International Stocks are shares of companies from outside their home country.
It can be beneficial to invest in International Stocks as these are impacted by different market forces and provide more diversification than a wholly domestic portfolio. As well as providing different risk and return patterns, these stocks give investors access to faster-growing economies.
ESG Stocks
Environmental, Social and Governance (ESG) Stocks emphasise environmental protection, ethical management practices and social justice practices.
ESG Stocks allow investors to invest in companies that exhibit responsible corporate behaviour and have values which align with their own. Instead of only focussing on whether a company is profitable and if it’s growing its revenue over time, ESG investors consider the company’s employees and customers, the environment, and the rights of the shareholders.
These stocks are judged by third-party rating systems.
Growth Stocks and Value Stocks
Growth Stocks are riskier than some of the other types of stocks, but their potential returns make them desirable to investors.
Growth investors buy stocks in companies whose equities they anticipate to rise rapidly in comparison to the broader market. These companies don’t usually pay dividends and tend to reinvest their earnings into the business to help it grow. In many cases, innovation is at the forefront of what they do and they’re focussed on disrupting their industries. Often, they’re more likely to be taking risks in order to grow quickly, which is what makes Growth Stocks more volatile.
In contrast, Value Stocks are more conservative investments that are usually offered by companies that are already industry leaders and don’t have the capacity to expand further. Shares in these companies are relatively inexpensive compared to their peers or their own previous stock price. This makes them a good option for investors looking for modest returns with less risk.
Income Stocks
Income Stocks are often referred to as Dividend Stocks, as payouts are usually made in the form of dividends. However, the term also applies to shares of companies with mature business models and less potential for growth.
These stocks are ideal for conservative investors, as they have less capital appreciation and lower volatility than other types, such as Growth Stocks. This means they’re ideal for those looking for a regular income from their investments.
IPO Stocks
When a company decides to go public, it can issue stocks at a discounted rate through an Initial Public Offering (IPO). IPO Stocks often generate a great deal of excitement among investors wanting to be the first to get in on a promising business concept. However, these stocks can be volatile — particularly if investors are divided about how lucrative their prospects are — and they might have a vesting schedule that prevents investors from selling their shares once trading begins.
Stocks typically retain their IPO status for one to four years after they become public.
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks are also put into different categories according to the total worth of all their shares. This is called market capitalisation.
The companies with the largest market capitalisation are referred to as Large-Cap Stocks, with Mid-Cap Stocks and Small-Cap Stocks representing smaller companies.
Large-Cap Stocks are viewed as safer, more conservative investments, as the companies offering these can generally weather market disruptions better than smaller companies. Companies with a market capitalisation of more than $10 billion are usually classed as Large-Cap Stocks.
Mid-Cap Stocks can provide better returns, but they are riskier. This is because they have the stability of established businesses as well as the potential for growth. Companies with a market capitalisation between $2 billion and $10 billion are usually categorised as Mid-Cap Stocks.
Small-Cap Stocks provide huge opportunities for growth, however, they carry a great deal of risk due to their exposure to market volatility. Small-Cap companies can include both those facing bankruptcy and those that are ready for acquisition and usually have a market capitalisation of $300 million to £2 billion.
Penny Stocks
As their name suggests, Penny Stocks are extremely inexpensive to buy, however, they come with a great deal of risk and are traded Over The Counter (OTC), rather than on major stock exchanges.
As revealed in the 2013 film ‘Wolf of Wall Street’, Penny Stocks have dangerously speculative business models and are prone to scams that can drain an individual’s entire investment.
Often, the companies behind Penny Stocks are either in financial trouble or the business never existed in the first place.
Investors who are prepared to take a punt on Penny Stocks should use a limit order to ensure they don’t end up paying more than they want to, as these stocks often have a large gap (“spread”) between the bid and ask price.
Safe Stocks
Also called “Low-Volatility Stocks”, Safe Stocks operate in industries that aren’t as susceptible to changing economic conditions. This means that compared with the rest of the stock market, their value doesn’t fluctuate as much.
Often, they will pay dividends, which can offset falling prices during times of difficulty.