A stock represents a small piece of ownership in a publicly traded company. If you own Apple Inc. (ticker: AAPL) stock, you are a partial owner of Apple the company. As a result, you may be entitled to certain benefits, like a share in the company’s profits through dividend payments or the right to vote on who will serve on the board of directors. Yet not all stocks offer the same benefits.
Even without dividends or voting rights, owning stocks can be lucrative if you choose the right company to invest in. “When you own a company’s stock, your money increases or decreases in value based on the performance or lack of performance of the company,” says Nicholas B. Yeomans, a certified financial planner and president of Yeomans Consulting Group Inc.
[Sign up for stock news with our Invested newsletter.]
The potential for positive or negative performance is a key reason you should diversify your stock portfolio. As an investor, diversification, or owning stocks in many different companies, helps spread your risk across various industries, asset classes, sectors and locations. If Apple has a bad turn of events, for example, your other stocks may still do well and keep your overall portfolio afloat.
To be truly diversified, you need to own not just many different stocks, but many different types of stocks. It doesn’t help much to have 100 technology stocks because if the technology sector falls out of favor, your entire portfolio will likely fall as well. Instead, you want to own stocks across different industries, sectors, sizes and geographies.
The Different Types of Stocks
The following categories represent the most common types of stocks:
— Common and preferred stocks.
— Large-cap, mid-cap and small-cap stocks.
— Domestic and international stocks.
— Growth and value stocks.
— Sector stocks.
— Dividend and income stocks.
— Safe and speculative stocks.
— Blue-chip and penny stocks.
— IPO stocks.
— ESG stocks.
— Specific industry stocks.
Common and Preferred Stocks
Both common and preferred stocks represent types of equity, meaning they give you ownership in a company, says Chris Dhanraj, managing principal of investments at CliftonLarsonAllen. “Typically, common stocks allow for the right for investors to vote on important company matters, whereas preferred stocks have no voting rights but have a higher claim on the company assets and dividends.”
In other words, if the company were to issue a dividend or go bankrupt, preferred shareholders would get paid before common shareholders but after bondholders.
Large-Cap, Mid-Cap and Small-Cap Stocks
The size of a company is determined by its market capitalization, or the current share price multiplied by the total number of shares outstanding. Stocks fall into one of the following sizes, according to the Financial Industry Regulatory Authority:
| Stock Size | Market capitalization |
| Mega-cap stocks | $200 billion or more |
| Large-cap stocks | $10 billion to $200 billion |
| Mid-cap stocks | $2 billion to $10 billion |
| Small-cap stocks | $250 million to $2 billion |
| Micro-cap stocks | Less than $250 million |
Mega- and large-cap stocks “belong to established, well-known companies,” Yeomans says. “Many of these companies make up many of the brand names that you may be familiar with.” Think Apple, Microsoft Corp. (MSFT), Coca-Cola Co. (KO) and Home Depot Inc. (HD), along with all the other names in the S&P 500.
Mid-cap companies “can be strong companies that you may or may not be familiar with,” Yeomans says. Examples of mid caps include health care companies like Jazz Pharmaceuticals PLC (JAZZ), energy companies like Vermilion Energy Inc. (VET) and many technology companies today.
Meanwhile small-cap and micro-cap companies are often startups or newer firms. “They can be riskier but offer growth potential,” Yeomans says. “While many times we consider small-cap stocks as new, some small-cap companies are more mature and established.” A few examples include LegalZoom.com Inc. (LZ), AMC Entertainment Holdings Inc. (AMC) and property manager Vacasa Inc. (VCSA).
Domestic and International Stocks
For U.S. investors, domestic stocks are from companies headquartered in the U.S., while international stocks are from companies based elsewhere. International stocks can be further divided into those from developed nations, such as Europe, Japan and Australia, and those from emerging-market nations, such as China, Brazil and Thailand.
“Domestic U.S. stocks are owned by both U.S. and foreign investors and are typically seen as high-quality, given strict reporting and industry regulations,” Dhanraj says. “International stocks are seen as riskier given lack of regulation, political uncertainty and currency movements.”
Emerging-market stocks are also viewed as more risky than developed-nation stocks because of a higher level of economic and political uncertainty.
Growth and Value Stocks
“A growth stock is anticipated to grow at a rate significantly above the average growth for the market,” says Megan Kowalski, managing director and partner with The Lerner Group at Hightower Advisors. “These stocks generally do not pay dividends because companies reinvest earnings in order to accelerate growth.”
A value stock trades at a price below what a fundamental analysis of the company indicates it should be worth. This occurs because these companies “are usually paying out some of their income in the form of a cash dividend instead of reinvesting into future business growth,” Kowalski says.
Sector Stocks
Stocks can also be classified by sector. The 11 stock market sectors include:
— Materials.
— Industrials.
— Financials.
— Energy.
— Information technology.
— Communication services.
— Health care.
— Utilities.
— Real estate.
“Investing in specific sectors allows you to focus on industries you believe will perform well,” Yeomans says. Meanwhile, investing in a variety of industries allows you to diversify so that you can protect your portfolio, regardless of which industry does well or poorly.
Dividend and Income Stocks
Dividend and income stocks tend to pay regular income to shareholders, usually as dividends. These distributions can be paid on a monthly, quarterly or annual basis.
“These companies tend to be more established companies with healthy cash flows,” Dhanraj says. “We prefer dividend growth stocks, which are companies that have paid or are increasing dividends for the past 25 years or more.”
It’s important to remember that dividends are not guaranteed. Even regularly dividend-paying companies can choose to cut or skip a dividend payment at any time.
Safe and Speculative Stocks
While all stocks carry risk, “safe stocks typically belong to stable, established companies with a history of consistent performance,” Yeomans says. “These stocks may be more mature in nature, perhaps less aggressive (in) growth potential, but may come with less volatility.”
Speculative stocks are considered more risky as they usually come from startups or companies in volatile industries. “These stocks may have more upside potential, but many times come with more volatility that you must be able to stomach,” Yeomans says.
Blue-Chip and Penny Stocks
A similar distinction can be made between blue-chip and penny stocks: “Blue-chip stocks are shares of large, well-established and financially sound companies,” Yeomans says. These companies tend to be high-quality and familiar names such as Apple, Coca-Cola and Johnson & Johnson (JNJ).
“Penny stocks are low-priced stocks, often trading for less than $1 per share, but they come with higher risk due to their volatility,” Yeomans says. “Investing here could also come with a lack of liquidity to sell your stock when you are ready.”
IPO Stocks
IPO stocks belong to companies that recently went public through an initial public offering, known as an IPO, and are offering shares for the first time.
“Companies tend to issue new shares through an IPO to raise capital to fund future growth or for existing shareholders to diversify their investments,” Kowalski says.
IPO stocks can be exciting because of their novelty, but these companies are also untested on the public stage, which can lead to a lot of volatility in the first few months or years of trading.
ESG Stocks
ESG stands for environmental, social and governance and refers to the key types of risks public companies may face.
For example, a company that produces a lot of greenhouse gases may incur fines or be subject to government regulations. A company with poor social skills inside or outside its doors may struggle with employee retention or partnerships with suppliers. A company with poor governance may have low diversity or conflicts of interest between shareholders and their board of directors. ESG companies rate well on each of these metrics, indicating they have lower risk of these adverse events.
ESG stocks “are chosen based on criteria related to sustainability, ethical practices and corporate responsibility,” Yeomans says. “ESG stock investing is becoming much more popular today, as people align their investments with their beliefs.”
Specific Industry Stocks
“Specific industry stocks represent subsegments of sectors and contain (fewer) companies,” Dhanraj says.
For example, within the tech industry, you may have companies focused on artificial intelligence or space exploration. Within the energy industry, there are oil companies and clean energy companies.
“Investing in these stocks allows you to target specific trends and technologies,” Yeomans says.
More from U.S. News
Invest Like a Billionaire: When to Sell Single Stock Positions
How Much Would $10,000 Invested in Tesla Stock at IPO Be Worth Today?
7 Preferred Stock ETFs to Buy Now
The Different Types of Stocks originally appeared on usnews.com
