If you are a beginner stock investor and do not understand the concept of types of stock and how they are crucial for making your investment decisions, you are in trouble.
Many investors lose their money and time in stocks, not because they invest in wrong companies rather than because they choose wrong types of stock.
Here is the complete guide for every beginner to understand how stocks are categorized and how you can pick the accurate type of stock according to your financial capability, lifelong goals, risk tolerance, and investment timeline.
There are many factors upon which types of stock depend. Here, I am elaborating them one by one for your complete understanding.
Types of stock based on Ownership Structure:
The two primary types of stock are categorized based on their ownership structure. These two types of stock are:
Common Stocks
Preferred Stocks
Common Stocks:
Being a common stockholder in a company means that you have a claim on the company’s assets and earnings. It can include you in decision making by giving you the right to vote in AGM (Annual General Meeting).
If the company performs well, you might get dividends, but they are not guaranteed.
Common stockholding offers you both higher risks and higher returns.
It does not offer you claim priority though. If the company faces any losses or goes for liquidation, then you will get remaining assets after settling liabilities and preferred stockholders’ shares.
Preferred Stocks:
In preferred stocks, the investors do not get voting rights, but they get higher priority than common stockholders.
Preferred stockholders get fixed dividends.
If the company goes for liquidation, preferred stockholders get paid before common stockholders.
Preferred stocks offer both features of equity and fixed dividends.
Preferred stocks have further divided into types like:
- Cumulative Preferred
- Non-Cumulative Preferred
- Callable Preferred
- Convertible Preferred
- Participating Preferred
Preferred stocks are more stable, less volatile, and offer less capital appreciation capability.
Types of stock based on Market Capitalization:
Market Capitalization is referred to as the current market value or size of a public company who offers stocks at the stock market. They are also called market caps sometimes.
Based on the size and financial capability of a company, market caps are categorized into three sections.
- Large cap
- Mid cap
- Small cap
Here I am elaborating these concepts in detail for the convenience of every beginner investor.
Large Cap:
Large cap companies are the giants of the market with net worth exceeding $10 billion.
Large cap companies are usually the largest companies in the market. They are long in the business, and their services and products are very well- known among masses.
They offer stability, higher profit margins, and fixed dividend deposits. It makes them a suitable option for income-focused investors.
They are less volatile and less affected by market fluctuations.
Large cap companies include big sharks like:
- NVIDIA Corporation (NVDA)
- Alphabet Inc. (GOOG),
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Amazon.com, Inc. (AMZN)
Mid Cap:
Mid cap companies are publicly traded companies who are typically in their growing phase with net worth of $2 Billion to $10 Billion.
They are well established and further expanding themselves to enter the large cap gang.
They are less volatile, more sustainable, and stable than small caps but more vulnerable to market fluctuations than large cap companies.
Mid cap companies offer high growth rates and potential to become blue-chip stock, but they can stick in value trap with less profits and liquidity.
They can be a good option to invest if you don’t want to stand on the edge and look for a middle way of safety and growth.
Small cap:
Small cap companies are the babies of the market with market value of $300 million to $2 billion.
They are very volatile and vulnerable to market fluctuations.
The risk factor in investing small cap companies is very high although they can give good returns if the company is performing well.
Here, I am sharing a comparison table between some large, mid, or small cap companies. It is based on the data collected from Trading view and Stock Analysis.
Types of stock based on Investment Style:
Investment style is an ideology or doctrine followed by an investor while buying stocks.
Every investor has a different mindset, timelines, financial capabilities, future goals, and risk tolerance. So, investment style varies from investor to investor.
Investment style investment offers typically two kinds of stocks:
Growth stocks:
In growth investing, companies focus on rapid growth by increasing profits and reinvesting the money instead of returning dividends.
If a company has a high Price to Earnings(P/E) ratio, then the growth chances are very fair.
But it also means that the company is overvalued.
Value Stocks:
In value investing, investors invest in those companies which are undervalued or underrated at the time, but they see potential in them in future.
In value stocks, companies have lower price to earnings(P/E) ratios.
Types of stock based on Economic Sensitivity:
Economic sensitivity is a condition that how a company responds to market fluctuations and trends.
Based on economic sensitivity, there are two major types of stocks:
Cyclical Stocks:
Those stocks who are highly prone to market fluctuations or oscillations are known as cyclical stocks.
They have a higher risk factor. The stocks of small cap companies are often cyclical.
Non-cyclical Stocks:
Non-cyclical stocks are those stocks which are not very receptive to market fluctuations.
They have less risk factors. The stocks offered by large cap companies are often non-cyclical.
They are not completely immune to fluctuations, but they sustain the downfalls.
Types of stock based on Geography:
The factors like stock market trends, investor mindset, statistics, and valuations are highly affected by location.
Because of geography there are two types of stock:
Domestic Stocks:
If a company is based in an investor’s home country, then their stocks are domestic.
For instance, if a US citizen is investing in Microsoft (MSFT), it is considered a domestic stock for him.
Domestic shares are easy to get, and an investor can research the company’s value and performance more efficiently.
International Stocks:
If the company is based outside an investor’s home country, then its stocks are called international stocks.
International stocks can maybe be affected by world political scenarios, and currency risks may be involved.
Types of stock based on Dividend Policy:
Many companies offer regular dividends to their investors from their profits. These stocks are called Dividend Stocks.
Dividend stocks may offer financial benefits, but it limits the growth as companies who offer regular dividends won’t reinvest the money.
Dividends can be delayed or canceled by the company because of any market downfall.
Why types of stock are important:
To become a pro stock market investor, you need to understand how stocks are categorized and then choose the best possible stock type according to your financial capacity, goals, and time horizons.
Many people lose their money and time not because they choose wrong companies, instead they are unclear of their goals and end up selecting wrong types of stock.
Before putting your eggs in a basket, you need to know about the basket.
To know more about the psychology and mindset behind the stock market investment, read out our previous article.
