What Are The Different Categories Of Stocks?

When people hear 'stocks', their mind quickly reverts to publicly listed shares of companies on the stock exchange. Buying a stock is similar to becoming part of its ownership. The only difference is that you won’t necessarily get to be a part of key management decisions. You may be able to vote on certain issues and determine annual or large-scale changes, but will have no say over the day-to-day running of affairs in the company. But there are some assets that will not offer you any voting rights in the organisation. Stocks can  be referred to as the basic building blocks of investing. 

However, it’s important that you get familiar with the different kinds of stocks that you will find on the market. Each of them has unique characteristics and will fit into a different type of investment. In this piece, we would review and take a look at the different categories of socks. By reviewing the meaning of each type of stock, it’s possible to make smarter and guided investment decisions. 

Common Stocks

This is the most common type of stock on the market. When most professionals and experts refer to stocks, they are talking about common stocks. A publicly traded company will issue various types of stocks - but the majority of them are common stocks. When you own common stock, you instantly get the right to vote on board members and have a say on corporate issues at the company’s annual meeting. 

For most companies, one share equals one vote. This means the number of shares that you are able to purchase would determine your voting power. For instance, a larger institutional investor with 30% shares has more influence over voting decisions than an investor who has purchased only 5 shares. 

If a stock performs well, there is no limit to how much it will increase in price. There are certain stocks that pay only dividends to shareholders, but without any payout guarantee. The only downside about investing in common stock is that they would be the last set to receive dividends if the company becomes bankrupt. 

Large-Cap Stocks

Aside from the different types of stocks issued by public companies and mentioned online, stocks may also be grouped based on the market capitalization of the company in question. This value is obtained by multiplying the number of a company’s outstanding shares with the present-day stock price. Public companies in the US stock market with a market cap of $10 billion or more are referred to as large-cap stocks. Due to the large size of the company or organization, they offer investors better stability and lesser risk. The dividends paid will be frequent, and they are the types of shares you can use to create an investment plan. What’s more? You have to only worry a little about market volatility and disruptions. 

The only downside of large-cap stocks is that the company is fully grown compared to newer, smaller startups. As a result, investors should not expect astronomical or outsized returns on investment. 

Mid Cap Stocks

This is another type of stock that is obtained based on the market cap of the company. Mid-cap stocks are shares offered by companies with a market capitalization between $2 billion and $10 billion. These stocks may represent potential large caps or large caps that have fallen below the pecking order. Mid-cap companies are renowned for having the stability of established businesses with the potential for astronomical growth. 

Mid-cap stocks offer the potential for growth as the company gradually expands its market share. However, they are often involved in mergers and acquisitions by large-cap companies. 

Small-Cap Stocks

Companies offer Small-cap stocks on the stock exchange market with a market capitalization between $300 million and $2 billion. There are more small-cap companies than large-cap and mid-cap combined. 

Many investors love to put their money in small-cap companies because of the potential for growth that they enjoy. These small companies are also the future mid-cap and large-cap companies. Despite the high potential of returns available in small-cap companies, they also offer a lot of risk and market volatility. 

However, it would help if you remembered that small-cap companies might include those facing bankruptcy or waiting for an acquisition. So, you have to be careful where you put your money. 

Cyclical and Defensive Stocks

Cyclical stocks are a unique set of stocks whose prices tend to surge when the economy is recovering from a slowdown. The prices of these stocks will also drop when the economy slows down. In simple terms, they follow the prevailing economic conditions at any time. 

Some cyclical stocks depend on customer spending and discretion. They include stocks of companies involved in retail, dining, technology, and travel. The value of their stocks may be affected by the taste of their consumers. 

On the other hand, defensive stocks are barely affected by uptrends and downtrends in the economy. Common examples of these are utilities, staple stocks, and healthcare stocks. They are defensive investments because their value remains the same regardless of economic condition. Most investors resort to this type of stock to save themselves from losses during economic downturns

Preferred Stock

All companies have a certain percentage of preferred stocks. However, they also issue some shares known as preferred stock. This type of stock offers investors the benefits of stocks and bonds in a single asset. 

There are different benefits of holding preferred stock. To start with, they offer holders guaranteed dividends alongside price appreciation. If the common stock of a company pays dividends, the dividends gotten from the preferred stock will be no doubt higher. The holders of preferred stock are also likely to receive a special form of compensation in case of liquidation of the company. 

Another interesting thing about preferred stocks is that they are “callable.” This means that the issuing company can buy back the preferred stock. Depending on the company in question, an investor may also have the option to convert preferred stock to common stock. The biggest disadvantage of trading preferred stock is that it does not confer any voting right on the investor. 

Class A and Class B Stocks 

Aside from those mentioned above, certain companies also issue different classes of stocks. Often, these classes are designated letters. For instance, we have Class A and Class B stocks. 

Most companies will create separate classes of stock to grant large investors more control over the organization's affairs. When they make Class A and B stocks, they issue class A to company founders, key executives, and important investors. On the other hand, the Class B stock will be made available to the general public and anyone interested in purchasing. Class A stocks may offer special investors up to 10 times more voting power than class B stocks. This is a great way to maintain control of the organization’s affairs and keep administration between insiders. 

One of the most popular companies based on these different classes of stock is Alphabet.Inc. Alphabet has type A shares, also known as GOOGL, which are common stocks that contain only one vote each. However, the company also has class B stock held by the original founders and early investors of the company. They enjoy ten votes on each share they own. Furthermore, there are class C shares, also known as GOOG, that are a common class of stocks. They don’t offer investors any voting power. 

Growth Stocks

Going further, growth stocks refer to stocks that are expanding their revenues, profits, share prices, etc., at a faster rate than what you’ll find on the market. The goal of investing in growth stocks is to enjoy exponential returns after a particular duration. However, these stocks are not the safest for any investor because they are likely to take on more risks to achieve a high level of growth.  

Often, growth companies invest their earnings back into the business and may not be interested in paying dividends. Most growth companies are small organizations that are new to the stock market. However, they are often focused on bringing innovations and disruptions to the entire industry. 

Value Stocks

These stocks represent the shares of companies that are on sale. Value stocks also represent companies that are underpriced in the stock market. Investors have to research and discover these stocks. Then, they buy them and wait for the rest of the need to awaken to their value. 

To identify these types of companies, investors look for organizations with a low price-to-book ratio or low P/E ratio. Stocks that look favorable under these conditions may have had their share prices compressed by market developments. As a result, they serve as stores of hidden value. 

International Stocks

As the name suggests, International stocks are shares from countries outside your home country. Investing in these types of stocks offers additional individual diversification. This is better than setting up a portfolio of US-based stocks that may be affected by local market forces. When you own an international stock, you can rest assured that no local details will affect the condition of your stocks. 

Buying international stocks may give investors access to a fast-growing economy with different risk and return rates. Also, investing in international stocks is a great way to hedge against the decrease in the buying power of the US dollar. But when the dollar gets stronger, these global stocks are weakened. 

Dividend Stocks

These types of stocks are renowned for providing a steady stream or flow of income, in addition to the benefit of price appreciation. Many investors will readily buy the shares of companies that promise dividends or returns to shareholders. 

Dividend Stocks may also offer tax benefits to investors. Most dividends are referred to as “qualified.” As a result, they are taxed at the same rate as long-term capital gains. This is a big advantage for any investor. Some dividend investors may also reinvest gains or returns as a means of compounding profit. There are several dividend reinvestment programs out there too. 

Conclusion

And that’s all on the different categories of stocks that we have on the market today. Undoubtedly, investing in stocks is one of the best ways to grow wealth in the short-term and long term. But when investing, you have to take note of the types/categories of stocks that you choose to put your money in. 

There are different types of stocks on the market. Each of them represents several countries and has unique features. They also offer investors amazing benefits that stand out. Are you a first-timer interested in finding out the types of stocks they have access to? Make sure you go over the information in this piece.