Different Types of Stocks Explained

Have you ever cooked a dish that came out just perfect?

It can be a great feeling to really pull off a difficult recipe for you and your dinner guests to enjoy.

Did you know: Preparing a good meal and investing money the right way is comparable, in a certain light. 👨‍🍳

For starters, both can be equally satisfying if done right. But it’s not so simple. In both cases, important groundwork needs to be laid out, which is the difference between filling our stomachs (or pockets) adequately—or coming up short.

Choosing the right ingredients for your financial portfolio can prove to be more challenging than finding the right ingredients from your Grandmother’s family-famous recipe. With the predictions of the International Monetary Fund that with global inflation along with the Omicron variant in 2022 the global market growth could be dented, especially for the U.S. and China. It could prove difficult to find investments that will perpetually yield massive returns in this dynamic economic landscape.

With the stock market’s average yearly returns of around 10%, one could argue that if there was a recipe for a sound financial portfolio, they should be included on the list. But just plainly adding some to your shopping cart won’t be a guarantee that they’ll instantly produce the sweet income you’re looking for.

Like it usually goes with every fundamental ingredient, the market is ‘stocked’ with a huge assortment of securities for you to pick from. Their overall price, liquidity, volatility, and more importantly potential returns may vary a lot depending on the type you choose and so may the results of your dish—you might not want it to be too ‘spicy’ and ultimately lead to deficits you can’t afford. 🌶️

There are many factors to be considered when choosing the correct type of stock you would like to include in your financial portfolio. Each ingredient for this dish has its very distinctive properties that need to be considered before being thrown into the pot, as they may affect your portfolio differently and may not necessarily align with your overall financial goals. 

So let us dive into the specifics of various and potentially appetizing types of stocks and see what each one brings to the table.

What Kinds of Stocks Are There? 📚

As you dive into the world of stocks, you will often hear about various classifications and categories that exist. In their essence, all stocks are investments in public companies. Stocks are also known as ‘equities’ and they are issued to gather funding for company expansions, product launches, paying off debt, and other factors.

At perhaps the most basic level, stocks differ because distinctive types of stocks afford their owners to various entitlements. In short, this means owning stock in company A doesn’t necessarily entail the same compensation as owning stock in company B.

With that being said, we can basically distinguish two major types of stocks—common stock and preferred stock. Let’s dive further into the fundamental differences between these two popular types of stocks.

Common Stock Explained 📘

As their name suggests, common stocks are the most frequent type of stock on the market and the one most people invest in as well. Common stocks are generally traded more frequently on the stock exchange than their preferred stock counterparts. Also known as ordinary shares, they represent an ownership stake in the company.

Common stocks come with significant shareholder privileges. These include the right to vote on important company decisions such as mergers or board member elections. Depending on how the company wants to organize its common stock, it can further be divided into class A and class B common stock. Class A owners usually have more voting rights and influence on the company’s operations than class B owners.

Common stocks come with various benefits. For investors, a considerable advantage is their capability for growth. If a company expands and grows, so will the value of its common stock, making it an enticing investment. 

Just look at Apple, who initially went public on December 12, 1980, at the price of $22 per share and has conducted a stock split five times since then. If you initially bought just one share, you would have 224 shares for $170 per single one in 2022. Who would’ve thought that slicing an apple could be so fruitful?

As Apple surpassed the predictions of analysts in 2021 with 11% higher revenues despite supply chain issues, there have been briefer periods in the past when its shares fell dramatically. In that aspect, common stocks are regarded as ingredients potentially too volatile to handle—but are also more likely to bring a rich taste to your dish.

Dividend payments are not guaranteed for common stock owners. In the event of a company’s failure, parties such as lenders, debt holders, and preferred stock owners, are prioritized over the common stock owners when it comes to getting their investment back. In return for taking that risk should the company bankrupt, common stock owners are lined up for more substantial returns in case everything goes well.

If you are looking to buy stocks for a future long-term capital increase, common stocks are a good option as they’re known to have serious upside potential. However, you should be prepared to cling to common stocks for an extended period if you expect a culinary masterpiece in the end. 

There could be times when the securities you own are not as popular on the market. Also, brace yourself for eventual losses if you sell your shares when their market value drops.

Preferred Stock Explained 📙

The shareholders of preferred stock have certain preferences over the common stockholders. If a company’s assets are liquidated, preferred shareholders are first in line to get the return of their capital. Also, preferred stock owners receive dividend payments before the owners of their common stock counterparts do.

Preferred shares do not come with voting rights, but there can also be more than one class of preferred stocks issued by a company. These can have different dividend payments, redemption dates, or values. The company can also issue so-called convertible stocks. In addition to other expected properties of preferred stocks, convertible stocks give shareholders an option to turn them into common stocks under certain conditions.

In terms of how they achieve capital returns, preferred stocks resemble fixed income securities such as bonds more than they resemble common stocks. The preferred stock returns are more predictable, and preferred shares are less erratic when it comes to the fluctuation of their market value.

The dividend payments, when compared to common stock or bondholders, are usually much greater and fixed at a certain amount. With common stocks, they could get entirely or significantly cut.

Another unique feature of preferred stocks is the set redemption price. If the company decides to repurchase the shares before the set date, the redemption price is the amount they have to pay to the stockholder. This set amount allows for the stock investor to fully recoup the invested amount.

For instance, let’s say the redemption price is $150 per share for preferred stock. Should the issuer decide to ‘call’ the shares and buy them earlier, they must pay the redemption price of $150 to the investor, regardless of whether or not its current market value.

Over the decade of 2010 to 2019, preferred shares averaged annual returns of 7.29%. They are not experimental ingredients in terms of flavor and rich cuisine, but their vanilla flavor is all too well recognizable and reliable in the stock market.

However, common stock is known to be in high demand among investors. This is so much the case, that many companies will only offer common stock, meaning preferred stock won’t always be on the menu. These preferred stocks, due to the lower risk involved, have reduced capacity for capital gains and as mentioned before, come with no real power when it comes to influencing a company’s decision-making.

If you are looking for a security that yields more stable returns and generates a steady income, these stocks may be the preferred choice for you. But as much as they resemble bonds, preferred stocks lack the security found in bonds.

Preferred shares are generally less fickle than common stocks, but it is important to note that their income is mostly fixed. What this means is, there is a chance that rising inflation might outpace your income rate and steal a chunk of food off your plate.

Different Categories of Stocks 🗃

Although common vs. preferred stocks are a major differentiator when it comes to the types of stocks available, it most certainly isn’t the only one. The market offers many gradations of flavor with different intensities on the financial spectrum. There is still a way to go before deciding on the right seasoning for your dough.

Stocks are further classified on numerous parameters into several different groups. These parameters could differ from the size of the company, type of industry, and dividend payments, to aspects such as their overall risk, volatility, and price trends they follow.

Based on such criteria, stocks fall under one or more categories, and the possibilities for combinations here are many. Don’t let this discourage you as it pays to know what each flavor in the stock market buffet will add to the overall balance of your financial diet. Let’s dig into each category and learn about the distinctive nuances they bear.

Growth Stocks 📈

Growth stocks usually have accelerated growth rates of revenue compared to market averages. Start-up technology companies are one of the more common examples of growth stocks. Usually, growth companies create innovative products or services that revolutionize the current market or create entirely new markets and industries altogether.

As start-up companies generally reinvest their income into their enterprise, this helps them prioritize their expansion and growth and achieve it more swiftly. This is why such stocks are often referred to as growth stocks. Buying growth stocks, however, is not to be confused with growth investing as it’s a bit more intensive than just picking securities you believe will grow in value.

The market value of shares could increase along with the growth of the company, and this could help you as an investor to earn greater profits when selling growth stock. The trade-off here is that, as all of the funding in start-up companies is usually directed towards their affairs, there will be no dividend income involved here—or it could be quite meager compared to other types of securities.

The market tends to award companies that can expand at a quicker pace and shareholders will reap the potential benefits in the process—the greater need for this unique flavor on the market, the greater your ROI could become.

This type of investment has enormous long-term upside potential, but it’s not very practical to consider it as a secondary source of income.

Unlike their counterpart, value stocks, growth stocks tend to be more expensive than your average stock when their price-to-earnings, sales, and free-cash-flow ratios are calculated. The other downside is that the company could stunt growth and thus limit potential returns.

Stocks of Shopify, which was one of the more popular growth stocks for instance (NYSE: SHOP), increased revenue by 46% in Q3 of 2021, but have declined by more than 50% from their peak and continued the downward trend in January of 2022. The volatility of growth spice can work for you and bring a feast of sorts to your table, but if you are not careful enough, you could potentially be looking at the financial equivalent of the Boston Tea Party.

Value Stocks 🥇

While their potential for growth and large profit is generally lower than that of growth stocks, value stocks bring the good ol’ well-known flavor of grandma’s kitchen to the table. Value stocks are usually those of well-established companies and market leaders in their respective industries. As such, their expansion potential is somewhat limited.

The ‘value’ of value stocks comes from the fact that, theoretically, their financial performance and actual worth are higher than the price that they are selling for at the market. Value stocks’ growth rates are usually considered ‘reliable’—but not breathtaking. In most cases, they do pay dividends and provide a steady source of income to the investor.

Things like negative publicity or legal problems can be indicators of a good time to purchase a potential value stock, as other investors may consider the company an ill-advised long-term investment. Value stocks will often have a decreased price compared to the shares of other companies in the same field of work, due to the period of adversity the value company may be going through.

As you will be (or at least hope to be) getting these shares at a discount, you could be looking at decent profits along the line once the company gets back on its feet. Even the best chefs get tired of certain spices and as they lose value, investors can swoop in and profit once they eventually flourish back to their former market glory.

Unlike growth stocks, these value stocks tend to have a bit more limited upside. The line between these two types of stocks can be sometimes blurry like in the case of tech giants such as Microsoft and Apple. For some of the stocks, a case could be made that they belong to both categories due to their long tradition and impact they have on the market with their continual business development and improvements.

Income Stocks 🐕

Income stocks produce a steady stream of revenue through dividends they pay, hence they are also known as dividend-yield, dividend, or dog stocks. Like value stocks, income stocks usually represent stable and established companies, meaning there is not much room for growth and expansion. Consequently, the market price of income stocks may not rise as much compared to other stocks.

The higher the share price of income stocks, the higher dividends that they distribute could be and so could your ROI. As they come with a promise of regular dividend payments, the preferred stocks we already mentioned are also sort of income stock. They are not necessarily a good acquisition for a banquet, but their consistent returns won’t leave you with an empty stomach.

As they produce a steady stream of income, income stocks are popular among investors that are looking for a secondary source of revenue and can use them to either reinvest it further or cover some other costs. Additionally, as they are usually well-established companies this also makes them less volatile and safe in terms of risk—a great ingredient to a balanced portfolio diet.

Another nice benefit income stocks could potentially have is that the dividend income may be subjected to a reduced, long-term capital gains tax. Such is the case for qualified dividends, that are paid by U.S. companies, or companies that can be easily traded on the U.S. stock exchange.

Blue-Chip Stocks 🔵

Purely based on the perception of recognized quality, we can observe two additional types of stocks. One of them is blue-chip stocks, named after the blue-dyed chips in poker which are considered to be the most valuable in the game. In terms of their overall security, they are pretty far from a gamble, unlike their name would suggest.

Blue-chip stocks are shares of well-established and well-known companies with a proven track record among shareholders and consumers alike. Blue-chip shares have a history of steadfast and solid returns over the long term—this is why they are generally considered to be among the safest and the most stable of spices in the pot of stock exchanges, and also one of the most popular.

Blue-chip companies also make regular and often growing payments of dividends. While they don’t typically provide the highest returns, their lack of volatility makes blue-chip stocks beloved among more conservative, low-risk investors. Especially in times of uncertainty, as interest for these securities grows while we may be possibly looking at a market “superbubble” in 2022.

While the perception of investors that blue-chip stocks as an investment are capable of surviving different challenges of the market is largely accurate, it is worth noting that these stocks are not completely bulletproof either.

A good example of why blue-chip stocks probably shouldn’t be the only security in an investor’s portfolio is the case of General Motors. In June of 2009, the company, once the largest automaker in the U.S., was forced to file for bankruptcy after years of market share declines and plunge in sales.

Penny Stocks 🪙

On the opposite side of the spectrum of the blue-chip stocks’ recognized quality are penny stocks. Penny stocks are shares of unproven companies that usually trade for under $5 per share and are ironically much more of a wager than their blue-chip counterparts, although they were not named after an asset on the poker table.

Penny stocks are usually shares of smaller companies valued well below $100 million. Although some of these securities trade on exchanges such as NYSE, a larger number of them are traded over the counter via OTC Bulletin Board.

As they are highly volatile, penny stocks could potentially net you incredible returns due to their lower market cost. There are two sides to this penny too, as the movements in their value are difficult to predict. Penny stocks are sort of a mystery spice with rather unknown properties and are meant for the ones willing to take a culinary risk. ⚗️

The liquidity of penny stocks could potentially be extremely low as they are not that frequently traded. As a result of this, you could potentially be stuck and not able to sell your penny shares. The companies that issue penny stocks are more often prone to bankruptcy as well, and they typically do not pay dividends at all.

Penny stocks are frequently targets of so-called ‘pump and dump schemes. Their value is hyped until the point shares reach a certain price, misleading investors to believe that penny stock’s market worth is growing. Scammers then sell penny shares and stop the hype they have created, causing investors that arrived later a significant loss of money as the penny stock value promptly declines.

Those who are willing to take a risk and invest in penny stocks due to their large profit potential have to be prepared for potentially substantial losses as well. It pays to learn how to recognize potentially dangerous and fraudulent penny stocks before doing so, as well as leveraging the top brokers for penny stock trading, thereby minimizing the gamble as much as possible.

Large-Cap Stocks 💰

Well, we’ve mentioned that stocks come in all shapes and sizes, and their ‘size’ is another differentiator we could use to divide them even further—with size meaning the total worth of shares they own, or in other words, their market capitalization. At the top of that list would be large-cap stocks, as their name suggests.

Large-cap stocks are the largest companies on the stock market, such as Coca-Cola (NYSE:KO) or Amazon(NYSE:AMZN). Their market capitalization is usually $10 billion or greater, and more often than not, they fall under the blue-chip category of stocks as well.

Given that they are industry giants, the room for growth is not that great. But their ‘size’ also works in their favor as they are considered more stable investment options. Another plus they have over smaller companies is that due to their large reserves of cash, they will often pay higher dividends than that of your average income stock. 

The tradeoff here is that the prices of large-cap shares could stagnate due to that very lack of room for expansion and smaller companies could outperform them in the long run. Large-cap stocks are sort of a slow-cooking cauldron type of dish with a relatively small chance of an implosion but the taste won’t differ spectacularly.

Mid-Cap Stocks 💵

In second place, in terms of size, are mid-cap stocks. Shares of mid-tier companies have certain characteristics of both their larger and smaller stock market equivalents. You could say that they have the best of both worlds, but mid-cap stocks also draw their risks from the same place as well, to an extent.

Stocks of companies with market capitalization between $2 and $10 billion fall under this category. They are well-known companies such as Dunkin’ Brands Group (NASDAQ:DNKN) and Grubhub (NYSE:GRUB) which are both stable on the market and have a decent expansion potential that goes along with it. 

Some mid-cap stocks fall under the category of so-called baby blue-chip stocks due to their consistent track record which is accompanied by a steady increase in value. Baby blue-chip stocks lack the starting market value of the real blue-chip ones, but they perform well over the long term and could potentially reach them in ‘size’. 👶

While they are generally more volatile in terms of security than large-cap stocks, the best mid-cap stocks are still somewhat more stable than the small-cap ones. Mid-cap stocks are usually in the “middle” in terms of their general prosperity, volatility, and involved risks.

Small-Cap Stocks 💸

Last but not least, we have small-cap stocks, which represent the smallest companies among these three but are not to be ignored based on their proportions alone. Small-cap stocks are like very potent spices that could drastically change the course of your investment dish in a positive and negative sense alike.

Small-cap stocks are those with a market capitalization of between $300 million and $2 billion and are usually young companies with serious growth potential but at the same time are significantly less stable than their larger peers. Some of the stock exchange’s market titans such as Amazon started as small-cap securities. Contrary to this, some small-cap stocks lost their market value and never recovered.

If you wish to eventually generate significant returns via patient investment, then this might just be the ingredient that you want in your portfolio—as long as you can weather its potential price volatility.

Every company growth spurt can greatly affect the market price of small-cap stocks, but it can just as easily decline. As small-cap companies are in their initial stages, predicting the course of this dish can prove to be quite difficult.

IPO Stocks 🌱

Once a company decides to go public, its stocks are issued through an initial public offering (IPO) and they get the status of IPO stocks, which they usually maintain for at least a year or potentially as long as four years after it becomes public.

IPO stocks usually get allocated at a discounted price before the company is listed on the stock exchange. To prevent investors from selling all of their shares once the trade on the exchange begins, they may also include vesting schedules.

If you are looking for fresh growth stock ingredients, the IPO stock market is potentially very fertile ground for your hunt. The bigger the expectations for these seedlings, the higher the price IPO stocks can achieve. Should there be a disagreement on the quality of the prospect, prices can turn out to be volatile.

While there have been some clear success stories, not every seed will grow to reach its full potential and turn out to become an Apple tree. Some may fumble as Paytm did, whose share dropped by 58% since it was listed in November of 2021.

ESG Stocks ♻️

If your ethical principles and social awareness are more important to you than generating high revenue, ESG investing may be just the thing for you.

ESG stocks emphasizes environmental, social, and corporate governance rather than just observing their revenue growth: the company’s impact on the environment, employees, and customers are all taken into account.

For instance, a company whose stock falls under the ESG umbrella could prioritize reducing carbon emissions further below the national and industry average. Another example could be a company in a specific industry which aims to develop clean energy, such as a solar panel manufacturer.

Socially responsible investing (SRI) is a term tightly related to the rules of ESG stocks. By using an SRI screener, you can filter out companies that do not align with your values. This form of investing does a lot more than just omitting companies that fail these tests, but eagerly encourages corporations who do good.

ESG stocks drew a lot of interest in recent years and outperformed their expectations in 2021. In addition to bringing positive change to the environment, ESG stocks do not necessarily exclude profits from the equation, but that isn’t necessarily the main course of this meal.

Cyclical Stocks 🚲

Cyclical stocks and their market value are largely affected by the performance of the economy. The market value of these shares closely follows the ‘cycle’ of recession, expansion, and recovery of the economic climate.

Industries like manufacturing, travel, and luxury goods fall under the category of cyclical stocks. All of the major downfalls in the economic picture significantly reduce the customer’s purchasing power in this field. Starbucks (NASDAQ: SBUX) and Nike (NYSE: NKE) are two popular examples of cyclical securities.

However, when the economies are solid, a surge of demand can cause the prices of cyclical securities to grow rapidly. They could also outperform the ROI of other stocks in a bull market.

The movement of cyclical stocks is seemingly predictable due to its correlation with the economic cycle. For that reason, experienced investors attempt to time and buy cyclical stocks at the lowest and sell them at their highest market price.

In order to cook these ingredients just right, you need to time the temperature almost perfectly. But relying on cyclical stocks along—and nothing else—could leave you with an empty stomach. This does not mean that you should avoid cyclical stocks completely. Investors usually gain exposure to these stocks via ETFs.

Non-Cyclical Stocks 🧱

Contrary to cyclical stocks, non-cyclical stocks, also known as secular or defensive stocks, are more consistent in terms of market demand. Non-Cyclical stocks include the consumer goods and services that people will buy through the thick and thin of economic downturns.

In simple terms, people will need food, water, and gas even in the case of the zombie apocalypse. Or even worse—when the relevant economy performs poorly.

A good example of non-cyclical stocks would be a grocery store chain, such as Walmart (NYSE: WMT.) Due to their strength through financial adversity, non-cyclical stocks are less likely to file for bankruptcy even under very grim circumstances.

Defensive stocks may prevent significant losses by safeguarding your portfolio in case of unfortunate events such as a sell-off or during a bear market. As defensive securities are generally safe and consistent, they could also fall under the category of blue-chip, value, or income stocks.

As cyclical and defensive stocks usually outperform each other in different economic climates, it is good to have a balanced diet of both in a financial portfolio. It gives an investor an umbrella of sorts during the rainy periods of investing, but also an opportunity for a bountiful harvest when the market eventually flourishes.

Pros and Cons of Investing in Stocks ⚖

We have covered all the seasonings and ingredients you could be potentially mixing into your portfolio. But based on their properties alone, there is still no guarantee that achieving the desired financial result will be straightforward.

You cannot have your financial cake and eat it too, or rather, as there are advantages to investing in stocks there are also disadvantages you might encounter. It is desirable to get familiar with the pros and cons of stock investing, to be aware of all the associated risks.

Pros of Investing in Stocks 🌟

For an extended period of time, stocks have averaged annual returns of 10%, which is considered sufficient to outpace inflation. It is safe to say that they are one of the better securities on the market in terms of beating inflation, in recent years.

An investor can spend a lot of time studying the specifics of each ingredient to become a stock master chef. There is an easier route as well which includes investing in one of the low-fee broad market index funds with approximately identical returns. One doesn’t have to be a financial prodigy to profit from stocks or possess huge capital to invest in them—there are few barriers to entry.

As we have seen, there are many flavors and nuances of stocks. Depending on what you are looking to make out of the financial portfolio plate, there is more than enough to choose from. There are riskier, more daring, and also safer, conservative options investors could include—or make a blend out of the two which suits a specific appetite.

Stocks’ liquidity will also allow investors to quickly access their funds should they want to reinvest further or just reap the benefits of their cooking. The stock market buffet is open every weekday (minus U.S. federal holidays), and potential buyers or sellers are usually not hard to find should an investor decide to trade with them.

Cons of Investing in Stocks ⚠

Even though the average return of stocks outperforms alternative forms of investments, returns are not guaranteed and depend entirely on market circumstances. Patience is often the key if one is looking to increase wealth through the stock market. It can usually take years to achieve the desired results if an investor is building their portfolio from the ground up.

Another thing to consider is the volatility of stocks. You’ve probably heard that term numerous times before—but with a good reason. Fluctuations in prices could drastically affect your investments, not always in a positive manner.

While the stock on average goes up most of the time, it is not straightforward. There are plenty of downfalls and straight lines along the way too. During those times you won’t be able to count on the money invested in stocks unless you sell for a loss—and lose some of your initial investment.

If you don’t exactly know your way around the stock market kitchen, you could easily get hurt. Investing money in securities you don’t know much about, day-trading, or trying to time the market can result in a financial equivalent of a serious burn.

But the matter of fact is even if you know what you’re doing, the market can sometimes be simply too volatile. Even the well-planned and logical investments won’t always play out as you have imagined—another risk you should be prepared to take.

How Can I Buy and Sell Stocks? 👨‍🏫

So you are eager to roll up your sleeves and step into the kitchen of stock investing, completely aware of the pros and cons of this ordeal. You still need to know one important detail—how and where do you get into buying and selling stocks?

You need to get some ingredients first of course, but to carry them, you would need a specific kind of bag, or rather, a specific account. Opening a brokerage account is the first step in trading stocks. If you don’t have one, you can find an online stock broker that fits your needs and prepare a brokerage account in no time.

After that, you will need to analyze the recipe for the portfolio you have in mind and see which ingredients are optimal for your financial goals. Ideally, whether you’re buying or selling stocks, you will be observing the movement of the market price and once you see a good opportunity, you will proceed to checkout.

In most apps for stock trading, there are numerous order types available to purchase stocks. There are also options to set price limits, ensuring that you don’t overpay or lose money on your transaction.

In a few clicks, you will have the ingredients you need, or get rid of the unwanted surplus. You can also configure more sophisticated techniques such as stop-loss orders to protect yourself from losing whenever the market experiences sudden drops. Certain macro-oriented world news events, such as Russia invading Ukraine, can have a massive impact on financial markets.

Conclusion 🏁

Having various types of stocks in your financial portfolio can affect potential returns in a number of different ways.

If the types of stocks you opt for are unpredictable and bear risk, they can spice up your dish and make it exquisite. Yet, there’s also a chance the finished meal won’t come out as desired, making it financially difficult to swallow. Other kinds of stocks might taste a bit stale in comparison as they won’t net you any spectacular revenues, but are a bit easier to digest with your wallet.

Knowing how to mix these seasonings—and in which proportions can keep your investments fresh and tasteful—could lead to some great returns as well. To become a great stock chef, it takes a great deal of patience, and knowing the properties of your ingredients is potentially the first step in the recipe for financial success.

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