When it comes to investments, stocks remain one of the biggest investments in today’s economy. While buying shares of a company may have implications, it could also be very profitable in the long run. Nonetheless, different types of stocks perform differently, depending on the general state of the economy in the world. Hence, it is important to understand all types of stock so that you can have the upper hand when it comes to stocks.
Types of Stocks
Common Stocks vs. Preferred Stocks
Common stocks, also known as ordinary shares, entail the shares of a company, which usually include dividends. Owners of common shares become part of the board of directors and have a right to vote on the decisions regarding the company.
Similar to common stocks, preferred stocks work in the same manner. However, preferred stocks are preferred before common stocks. To illustrate, people who own preferred stocks are paid dividends first before common stocks. However, people that own preference shares do not have voting rights. These stocks are usually used to provide a stable passive income.
Growth Stocks vs Value Stocks
The name growth stocks suggest what these stocks are about. Growth stocks are shares that have a higher likelihood of growing more than other shares. Growth stocks usually increase during economic expansions and when during lower rates of interest rates. Because of technological advancements in recent years, stocks in the technology industry are usually considered growth stocks because of their high growth potential.
Value stocks, on the other hand, have better value than what the market may indicate. These types of stocks perform well during the economic recovery. Investors usually use-value stocks to have passive income. Some of the industries in which we can find value stocks are healthcare, energy, and financial industries.
Income Stocks
Just as the name suggests, income stocks pay shareholders regularly through dividends. The prices of such stocks are less volatile and entail less risk. Because of that, many people invest in such stocks to have a regular passive income. These stocks can be accessed via Amplify High Income ETF (YYY).
Blue-Chip Stocks
You may have heard of the term blue-chip when talking about stocks. Blue-chip stocks are those stocks that most people have heard about. These stocks have the largest market capitalization, and they usually perform very well in the long run. Most of the blue-chip stocks lead the industries in which they operate. Some examples could be Microsoft Corporation (MSFT), McDonald’s Corporation (MCD), etc.
Cyclical vs Non-Cyclical Stocks
As the name implies, cyclical stocks are those stocks that perform well during economic expansions, peak during economic peaks, and decline during economic recessions. Because of that, such stocks are usually volatile, but at the same time could be more profitable in the short run. Some examples are Apple Inc. (AAPL), Nike, Inc. (NKE), etc.
Contrary to that, non-cyclical stocks are stocks that have a negative relation to economical cycles. Also known as recession-proof stocks, these stocks perform better than cyclical stocks during economic recessions. While they may not decline during expansions, non-cyclical stocks are usually considered less risky than cyclical stocks, primarily due to the recession-proof feature that they have. Some examples of non-cyclical stocks are The Coca-Cola Company (KO), PepsiCo, Inc (PEP) The Procter & Gamble (PG).
Defensive Stocks
Defensive stocks are those stocks that are usually safer and less profitable as investments. These stocks perform relatively well during any economic state. Hence, these stocks are used by people that do now want to be affected by bear runs or economic recessions. Defensive stocks can be non-cyclical, blue-chip, value, or other types of stocks. Some examples could be telecommunication companies such as AT&T Inc. (T).
IPO Stocks
IPO Stocks are stocks that hold an Initial Public Offering (IPO). IPOs are usually held by companies that will be listed on the stock exchange, and that want to issue initial shares. Usually, companies that go public and have an IPO also have a vesting schedule that distributes the shares in a timely manner.
Penny Stocks
You probably have heard of penny stocks in the legendary movie The Wolf of Wall Street, where Jordan Belfort scammed people through the use of penny stocks. Penny stocks are those stocks that sell for less than $5, and they are prone to high speculation due to their lower market cap and high volatility.
ESG Stocks
ESG Stocks is an abbreviation for Environmental, social, and corporate governance (ESG). These stocks prioritize protection in the above-mentioned fields. These stocks are the ones that aim to reduce carbon emissions, aim for social justice, etc. Because of their importance and utility, ESG stocks have gained quite the popularity over the years as people become more socially conscious due to social media.
New York Stock Exchange. Source: Investopedia
Frequently Asked Questions (FAQ)
What are the 4 types of stocks?
There are more than four types of stocks that you can invest in: common stocks, preferred stocks, growth stocks, value stocks, income stocks, blue-chip stocks, cyclical stocks, non-cyclical stocks, defensive stocks, IPO stocks, penny stocks, and ESG stocks.
How do you categorize stocks?
Stocks can be categorized depending on the size of the issuing company, dividend payment, industry, risk, volatility, fundamentals, etc.
What are different types of stocks depending on the market cap?
Based on the market cap, stocks are categorized as low-cap, medium-cap, and large-cap stocks.
Takeaways
- Stocks are shares that are issued by companies that go public.
- There are various types of stocks, depending on the industry, risk, volatility, dividends, etc.
- Some types of stocks are common stocks, preferred stocks, growth stocks, value stocks, income stocks, blue-chip stocks, cyclical stocks, non-cyclical stocks, defensive stocks, IPO stocks, penny stocks, and ESG stocks.
- Based on your preference, you should invest in stocks but you must thoroughly research beforehand.
