Akash Jha
When most people think of stocks, they picture publicly traded shares on a stock exchange. However, it is crucial for investors to be familiar with the many stock options, to grasp their individual characteristics, and to realise whether a particular stock can be a good fit for their portfolio. To help investors better understand the many stock options available to them, we’ve outlined each type of stock below.
KEY POINTS
- Understanding the various stock categories can assist investors in making more informed investment decisions and reducing portfolio risk.
- Prior to the distribution of dividends to common shareholders, preferred stock pays dividends to its holders, but does not confer voting rights.
- Income securities distribute a company’s profits or excess cash through dividends that are greater than the market average.
- Blue-chip equities are shares of well-established, market-capitalized corporations.
- Environmental, social, and governance (ESG) equities emphasise environmental protection, social justice, and ethical management practises.
Common and Preferred Stock
Common stock, also known as ordinary shares, is a form of equity participation in a corporation. Stockholders of this type are entitled to dividends from the company’s earnings. The board of directors and corporate policies are both decided by a company’s common investors. In the event of a company liquidation, holders of common stock have the right to the remaining assets once preferred stockholders and other creditors have been paid in full. frequent stock is a frequent form of compensation for company founders and employees.
However, holders of preferred stock, also known as preference shares, are entitled to receive dividends on a regular basis ahead of common shareholders. As was previously noted, preferred shareholders are the first to be repaid in the event of a company liquidation or bankruptcy. Investors wanting a steady stream of passive income may prefer preferred stock, which lacks the opportunity to vote.
Both common and preferred stock are available from a lot of companies. The parent company of Google, Alphabet Inc., has two different types of stocks listed: the ordinary Class A stock under the symbol “GOOGL” and the preferred Class C stock under the symbol “GOOG.”
Growth Stocks vs. Value Stocks
Growth stocks, as the name implies, are shares that investors anticipate growing at a higher rate than the market as a whole.Growth stocks have historically done well during periods of economic growth and low interest rates. For instance, because to the improving economy and the availability of cheap capital, technology equities have dramatically outperformed the market in recent years. The SPDR Portfolio S&P 500 Growth ETF (SPYG) is a specialised exchange-traded fund (ETF) that allows investors to track growth stocks.
Contrarily, value stocks have more attractive values than the market as a whole since they trade at discounts to what a company’s performance might otherwise indicate.The financial, healthcare, and energy sectors are examples of value companies that often perform well during economic recoveries because of their consistent earnings. The SPDR Portfolio S&P 500 Value ETF (SPYV) allows investors to monitor value stock performance.
Over a ten year period, growth stocks posted a greater return than value stocks by more than three percentage points. Effective June 2022.
Income Stocks
Income stocks are securities that pay out dividends at a higher rate than the market average, providing investors with a steady stream of income. companies like utilities tend to be less risky and provide less potential for growth than growth companies, making them attractive to conservative investors who want a steady stream of income.Amplify High Income (YYY) is an exchange traded fund that gives investors exposure to high yielding equities.
Blue-Chip Stocks
Blue-chip stocks are shares in significant, well-known corporations. They have consistently been at the top of their field and producing reliable profits for years.In times of great unpredictability, conservative investors may prioritise holding blue chip stocks. Tech titan Microsoft (MSFT), fast food pioneer McDonald’s (MCD), and oil heavyweight Exxon Mobil (XOM) are all instances of blue-chip stocks.
Cyclical and Non-Cyclical Stocks
Cyclical stocks rise and fall in tandem with the expansion, peak, and recovery phases of the economic cycle. When the economy is doing well and people have more disposable income, these equities tend to be more volatile and outperform the market.Companies like Apple Inc. (AAPL) and Nike Inc. (NKE), which manufacture and sell athletic equipment and apparel, are examples of cyclical equities. The Vanguard Consumer Discretionary ETF (VCR) is a great way for investors to diversify their holdings with cyclical stocks.
However, non-cyclical stocks are those that are in “recession-proof” industries that do pretty well regardless of the economy. Since demand for fundamental goods and services tends to be largely stable even during economic downturns, non-cyclical stocks tend to outperform cyclical ones.Large-cap defensive equities like The Procter & Gamble Company (PG), beverage giants PepsiCo, Inc. (PEP), and The Coca-Cola Company (KO), and others are represented in the Vanguard Consumer Staples ETF (VDC).
Defensive Stocks
In most cases, the returns on defensive stocks are stable regardless of the state of the economy or the market. Essential goods and services are what these businesses specialise in, thus you’ll often find them in the grocery store, hospital, and power plant. Protecting a portfolio from heavy losses during a market downturn may be possible with the help of defensive stocks. One stock that is defensive may also be categorised as value, income, non-cyclical, or blue chip. Invesco Defensive Equity ETF (DEF) main holdings include Verizon (VZ) and Cardinal Health, Inc. (CAH), two of the largest telecommunications and healthcare corporations in the world, respectively.
Due to their ability to maintain profit levels even in bad economies, defensive stocks are less likely to go bankrupt.
IPO Stock
A company’s initial public offering (IPO) is the first time its stock is sold to the general public. Before a company’s stock is listed on a stock exchange, the stock is usually allocated to investors at a discount. In order to prevent investors from selling all of their shares at once when trading begins, a vesting schedule may be implemented.”IPO stocks” is another phrase used by market analysts to describe newly listed companies. Through Nasdaq, investors can keep tabs on when IPOs are scheduled to occur.
Penny Stocks
The term “penny stock” is commonly used to describe shares of stock with a price tag of less than $5. Many penny stocks trade on the OTCQB, a secondary over-the-counter (OTC) market for U.S. equities that is run by OTC Markets Group, while others do trade on major exchanges. Penny stocks typically have a wide gap between the bid and ask price, therefore investors may want to use limit orders when buying and selling.
After the debut of The Wolf of Wall Street, a film about a con artist stockbroker, penny stocks became a cultural phenomenon. Those interested in betting on microcap companies should investigate the iShares Micro-Cap ETF (IWC).
ESG Stocks
What Is the Main Difference Between Common Stock and Preferred Stock?
Preferred stock provides its holders preference in receiving dividends from a corporation but no voting rights.
What Type of Investor Do Income Stocks Suit?
Income stocks are best for conservative investors who want a steady stream of dividend payments.
What’s a Key Characteristic of Defensive Stocks?
The returns on defensive stocks tend to be stable throughout a wide range of economic and stock market conditions.
Where Can I Buy Speculative Penny Stocks?
The OTCQB is an over-the-counter (OTC) market for middle-tier U.S. equities that allows investors to purchase highly speculative penny stocks.
The Bottom Line
Understanding the main distinctions between stock classes enables investors to make more informed investment decisions and manage portfolio risk. In addition to purchasing various stock types directly, investors can obtain cost-effective exposure to themed stock types via ETFs.
