A stock is an investment into a public company. When a company sells shares of stock to the public, those shares are typically issued as one of two main types of stocks: common stock or preferred stock. Here’s a breakdown.
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Types of stock
1. Common stock
If you’re new to investing in stock and looking to buy a few shares, you likely want to invest in common stock, which is exactly what the name suggests: the most common type of stock.
When you own common stock, you own a share in the company’s profits as well as the right to vote. Common stock owners may also earn dividends — a payment made to stock owners on a regular basis — but those dividends are typically variable and not guaranteed.
2. Preferred stock
The other main type of stock, preferred stock, is frequently compared to bonds. It typically pays investors a fixed dividend. Preferred shareholders also get preferential treatment: Dividends are paid to preferred shareholders before common shareholders, including in the case of bankruptcy or liquidation.
Preferred stock prices are less volatile than common stock prices, which means shares are less prone to losing value, but they’re also less prone to gaining value. In general, preferred stock is best for investors who prioritize income over long-term growth.
» Learn more: How to make money investing in stocks
Common stock | Preferred stock | |
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Pros |
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Cons |
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Best for | Investors looking for long-term growth. | Investors looking for income. |
Within those broad categories of common and preferred, different types of stocks are further divided in other ways. Here are some of the most common:
3. Large-cap stocks, mid-cap stocks and small-cap stocks
You might’ve heard the words large-cap or mid-cap before; they refer to market capitalization, or the value of a company.
Companies are generally divided into three buckets by size: Large cap (market value of $10 billion or more), mid-cap (market value between $2 billion and $10 billion) and small-cap (market value between $300 million and $2 billion).
4. Sector stocks
Companies can also be classified into sectors based on what their core business is. The Global Industry Classification Standard (GICS) divides the market into 11 sectors:
Energy
Materials
Industrials
Consumer discretionary
Consumer staples
Health care
Financials
Information technology
Communication
Utilities
Real estate
Stocks in the same sector — for example, the technology or energy sectors — may move together in response to market or economic events. That’s why it’s a good rule of thumb to diversify by investing in stocks across sectors. (Just ask someone who held a portfolio of tech stocks during the dot-com crash.)
5. Domestic and international stocks
Stocks are frequently grouped by geographic location.
You can diversify your investment portfolio by investing not only in companies that do business in the U.S., but also in companies based internationally and in emerging markets, which are areas that are poised for expansion. (Here’s more on how to invest in international stocks.)
6. Growth and value stocks
You might hear stocks described as growth or value. Growth stocks are from companies that are either growing quickly or poised to grow quickly. Investors are typically willing to pay more for these stocks, because they’re expecting bigger returns.
Value stocks are essentially on sale: These are stocks investors have deemed to be underpriced and undervalued. The assumption is these stocks will increase in price, because they’re either currently flying under the radar or suffering from a short-term event.
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Types of stock classes
Companies might also divide their stock into classes, in most cases so that shareholder voting rights are differentiated. For example, if you own Class A of a certain stock, you might get more voting rights per share than owners of Class B of the same stock.
If a stock has been segmented into different classes, each class typically has its own ticker symbol. For example, 21st Century Fox shares are sold under FOXA (A shares) and FOX (B shares).
Choosing the right stocks for you
An important consideration when investing in stocks isn’t necessarily the stock’s category, but whether you believe in the company’s long-term growth potential and whether the stock complements the other investments you own.
But if the idea of assembling individual stocks into a diversified portfolio seems daunting — and it certainly can be — you might want to consider stock index funds.
Index funds are one of the easiest ways to build a diversified portfolio. These funds allow you to purchase many different types of stocks in a single transaction: They track a section of the market — such as large-cap stocks — by following a benchmark index, like the S&P 500. For more about index funds, read our full explainer.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As a seasoned financial expert deeply immersed in the intricacies of investing, let's delve into the concepts covered in the article with a comprehensive understanding.
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Common Stock and Preferred Stock:
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Common Stock:
- Ownership of common stock provides a share in a company's profits and the right to vote.
- Dividends for common stock are variable and not guaranteed.
- Suited for investors seeking potential long-term growth.
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Preferred Stock:
- Comparable to bonds, preferred stock offers a fixed dividend.
- Preferred shareholders receive dividends before common shareholders, even in bankruptcy or liquidation.
- Preferred stock is less volatile but has lower growth potential; it's ideal for income-focused investors.
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Stock Classifications by Market Capitalization:
- Large-cap Stocks: Market value of $10 billion or more.
- Mid-cap Stocks: Market value between $2 billion and $10 billion.
- Small-cap Stocks: Market value between $300 million and $2 billion.
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Sector Stocks:
- Companies are classified into sectors based on their core business (e.g., energy, healthcare, technology).
- Sectors respond collectively to market or economic events, highlighting the importance of diversification.
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Domestic and International Stocks:
- Diversify by investing in U.S.-based companies, international firms, and emerging markets for potential expansion.
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Growth and Value Stocks:
- Growth Stocks: Companies with rapid or anticipated growth; investors pay more for potential higher returns.
- Value Stocks: Deemed underpriced; investors anticipate an increase in price, making them attractive for value investors.
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Stock Classes:
- Companies may have different stock classes with distinct voting rights (e.g., Class A and Class B).
- Each class typically has its own ticker symbol, facilitating differentiation in the market.
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Stock Index Funds:
- Index funds provide a diversified portfolio by tracking benchmark indices like the S&P 500.
- Ideal for investors seeking a straightforward way to invest in a variety of stocks in a single transaction.
Choosing the Right Stocks:
- Consider the company's long-term growth potential.
- Assess how the stock complements other investments.
- If assembling individual stocks is daunting, stock index funds offer a simpler, diversified option.
In essence, the article provides a thorough overview of various stock types, classifications, and investment strategies, catering to both novice and experienced investors. The insights presented align with fundamental principles of investing, emphasizing the importance of diversification, risk management, and aligning investments with individual financial goals.
