What Are the Different Types of Stocks?

What Are the Different Types of Stocks?

When people think of the stock market, they immediately imagine the New York Stock Exchange or NASDAQ. But believe it or not, these stock giants are relatively young. The oldest stock exchange in the world is, in fact the Amsterdam Stock Exchange, founded in 1605.

The principle of a stock exchange is pretty simple: when investing in stocks, you own a portion of a company. The more stocks you own, the more stake you have in that company's affairs--and perhaps dividends, too. But did you know that there are different types of stocks?

Read on as we discuss what stock options you have and the benefits of investing in them.

Different Types of Stocks: Common Stock

If you are planning a stock strategy, then the common stock will make the largest part of it. These are the stocks we mentioned in the intro: partial ownership that gives you a stake in a company's business decisions. This allows you to vote on company affairs, such as electing members to the board of directors.

Of course, if that company sinks, you sink as well. If there's a windfall in stock market trends, then you reap those benefits too. As your share price goes up, so do your dividends.

If you attend My Investing Club, this is one of the first stock options you will buy.

Preferred Stock

Preferred stock has one critical difference compared to common stock: there are no voting rights. However, you do receive your share dividends in advance of people with common stock. Further, you can only redeem your shares once they reach maturity.

In other words, this is the stock that you buy only for dividends. This is not the sort of stock that you can expect to day trade and make big returns on.

If you want, you can redeem them before they reach maturity. And you can convert them into common shares if you so desire. Overall, preferred stock is a low-reward, but very low-risk option.

Large-Cap Stock

Large-cap stocks refer to stocks that fall into a specific value category. Namely, stocks and shares that pertain to a company with a large market cap. While there is no hard limit, many would agree that any company with $10 billion or more issues large-cap stocks.

Naturally, these large-cap stocks pertain to well-entrenched companies that have a long history of profitability. The very best-performing large-cap stocks get the title of blue-chip stocks. Most of the companies in the S&P 500 would fall under the large-cap stock categorization.

Mid-Cap Stock

Large-cap stocks refer only to the largest companies, such as Apple or Aramco. Moving down, we find mid-range companies that earn between $10 and $2 billion in shares.

In many cases, these are growing companies that have not yet proven themselves. Only in certain situations do we see older, established companies with lower revenue.

One thing is the same across the board: these are companies that show promise for mass profitability in the future. In many cases, large-cap stocks started out here. They made their way up from small-cap, to mid-cap, to large-cap stocks.

These stocks tend to be a bit riskier, given that they are not "too big to fail" like the large-cap giants.

Small-Cap Stock

Naturally, there is one final category: small-cap stocks. And this is where the fun begins. Many investing tips will tell you that these stocks are riskier but with the potential for a massive payout.

This is the venture capital of the stock market. Usually, small-cap stocks refer to any company below $2 billion. Most companies in this category are just starting out--i.e., startups and new small businesses.

Naturally, you have the chance to lose it all here. Many start-ups have a good beginning, only to fail in an epic way. They are particularly susceptible to lack of funding and economic downturn.

Further, small-cap stock is rife with fraud and deception. A perfect example of small-cap stock would be Theranos. This company misled investors, and the founders all went to court.

Growth Stock

Growth stock is tricky to classify. It refers to when stock market trends point to massive, sustained growth for a single company. This is a high-return, comparatively low-risk stock option.

Unfortunately, there is one big issue with growth stock: knowing went to buy. Wait too long, and you miss your chance. Growth stock has a tendency to have a massive spike in price once investors catch on.

If you were lucky enough to get onto the gravy train, the company in question rewards growth stock owners handsomely.

Value Stock

Think of value stocks as the bargain bin of the stock market. When stocks don't perform well, they can lose their market value. Then they become a value stock, which is typically a lower price per share.

The thing to understand here isn't that the stock is not worth much. It's that the market undervalues it. In other words, these are stocks in which only a few--like you--see the potential while other investors do not.

Don't discredit value stocks, though; investors like Warren Buffett became as wealthy as they did thanks to value stocks. That said, just because the stock is priced low doesn't mean it is a value stock.

Begin Investing in Stocks Today

Across the world, there are many different types of stocks available for purchase. Some of them, like common stocks, offer you dividends and voting rights in the company's affairs. Others, like value stocks, are untapped gold mines that it's up to you to discover.

Follow our blog for more investment and financial advice.


Image Credits: Freepik

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