What Are the Different Types of Stocks?
Those looking to invest in the market need a basic understanding of the different types of stocks.
Contributing Writer at Tally
August 2, 2021
If you follow the news, you’ve probably heard that the stock market has been quite strong recently. Knowing this, you may be interested in buying stocks and jumping into the market.
However, this task may be daunting if you're not familiar with stocks. And, you may feel as though you've already missed the boat and are too late to capture your full growth potential.
Fortunately, when it comes to long-term gains, the answer is not timing but time. Historically, the longer you are in the market, the more likely you are to capitalize on gains.
We’ll help you get started with basic market knowledge by covering different types of stocks. We’ll also go over the factors you should consider when beginning to plan out your future investments. By the end of this article, you should have a much better understanding of what you need to do to enter the market.
What is the stock market?
A stock is a financial instrument that allows you to buy into a company's equity. Stocks are also commonly known as shares. The number of shares you have of a certain company determines how much ownership you have in the company. For instance, if there are 1,000 shares available and you hold 10 of them, you own 1% of the company.
The stock market is a broad term for all of the markets and exchanges where stock brokers regularly buy and sell the shares of publicly traded companies. It is not possible to purchase stock in a privately traded company since they are not listed on the market.
There are two primary stock markets in the United States: the New York Stock Exchange (NYSE) and the Nasdaq. For a company to be listed on the NYSE, it must have upward of $4 million in shareholder equity. Shareholder equity is defined as the total of a firm’s assets minus its liabilities, such as debt. The Nasdaq listing requirements are that a company has a minimum of 1,250,000 shares available for public purchase upon listing.
There is one last thing to note about stocks, as it will come up frequently in our discussion of 12 different types of stocks below. Some stocks offer dividend payouts. A dividend is a distribution of a company's profit. The company's board of directors determines what, if any, dividends there will be.
What are some different types of stocks?
As mentioned, on a broad level, stocks represent an ownership stake in a company. But not all stocks are created equal. Below are 12 different types of stocks that you may come across when getting into the market. While you will likely hear these terms when investing, it’s worth noting that some stocks can fit more than one category.
1. Growth stocks
Growth stocks are those with typically large market capitalizations. Market cap is defined as the price of the stock multiplied by the number of outstanding shares. These stocks experience higher-than-average earnings and sales growth.
The stock price may continually grow quickly from year to year, though there is a bit more risk associated with them as a result. Growth stocks are not known to typically pay out dividends. You can consider these your "big fish" when it comes to market value.
2. Income stocks
If you're looking for a stock with high dividend yields, then an income stock is one of the best stocks available. There tends to be low volatility with these stocks, as the share price may not grow much from year to year. But, you'll typically receive higher-than-average dividend payouts. Income stocks are another safe-bet option, especially if you're looking for diversification in your portfolio.
3. Value stocks
A value stock is one perceived to be available at a lower price than what it is worth. By purchasing it, you believe that you're getting a good deal. Value stocks often have high dividend yields as well.
4. Common stocks
A common share indicates that a shareholder has voting rights. Common stockholders have ownership in a company, allowing them to elect members to the board of directors and vote on corporate policies.
5. Preferred stocks
Preferred stockholders receive access to privileges that common shareholders do not. Preferred shareholders have a higher claim to dividends or asset distribution than common shareholders. However, those with preferred shares typically give up access to their voting rights for corporate governance.
6. Small-cap stocks
A small-cap stock is one that has a market cap of less than $1 billion. However, as a result, investors may receive above-average returns. When a new company goes public through an initial public offering (IPO) and shares are made available for purchase for the first time, there's a strong chance the company is a small-cap stock.
7. Mid-cap stocks
Mid-cap stocks are those with market ranges between $1 billion and $5 billion. They balance your portfolio between small-cap and large-cap companies. They tend to be less risky than small-cap stocks.
8. Large-cap stocks
A large-cap stock is one with a market value greater than $5 billion. These stocks can be less volatile and safer during a downturn in the economy.
9. Penny stocks
Penny stocks are otherwise known as micro-cap stocks because of their low price. A penny stock is one that trades at less than $5 per share. These stocks can be risky if the company is not established. But, should the company become successful, the investment you make while the company is on the ground floor could produce tremendous results.
10. Blue-chip stocks
A blue-chip stock is one that is rather predictable. These stocks typically have predictable earnings and dividend payments. They have steady growth year to year and are generally considered a high-value stock. Though there are no safe bets in the stock market, these can be less risky than some other types of stocks. Blue-chip stocks are often also large-cap stocks.
11. Cyclical stocks
These stocks tend to closely follow market and business cycle trends. The earnings and overall market performance are often closely tied to the general state of the economy. These stocks may require more active management since their market price can change regularly with the economy. They are not necessarily the best for long-term growth.
12. Defensive stocks
Defensive stocks are the opposite of cyclical stocks. These stocks tend to remain strong, even if the economy begins to falter. They are a good option for parking some of your cash during an economic downturn.
What factors should you consider when starting to invest?
The investment decisions you make very much depend on your personal financial situation and goals. Only a certified advisor can give true investment advice. Having said that, there are three primary factors to consider.
The first is your risk tolerance. The stock market is considered the riskiest of financial investments, though it can also be the most fruitful. Do you feel comfortable losing money during a market downturn? Do you need funds in the near term, or can you weather losses and leave your money in the market to grow for retirement?
The second is diversification. One way to start diversifying is by investing in stocks across different market caps and industries. But you don’t want to stop there and only invest in stocks. Consider spreading your assets out to balance and broaden your portfolio. Real estate investing is one option to help diversify your assets.
Lastly, consider whether there are certain values that you stand for. For example, if you are a big proponent of the environment, you may not feel comfortable owning the stock of a company that has made environmental blunders. There are funds that focus on environmental, social and governance issues for those investors who are socially conscious.
There's no better time than the present to enter the market
If you are looking to invest your money for the long term, there's no better time to get into the stock market. Stock markets continually grow over time, which could help increase your net worth. The sooner you invest, the more time you have for your money to grow.
Before you begin investing, however, it's important that you have a basic understanding of what you're getting yourself into. We provided 12 different types of stocks today to help get you started. Also be sure to consider your risk tolerance, know your code of ethics, and diversify your portfolio.
If you'd like to continue growing your financial knowledge, check out the Tally blog and stay informed.