The majority of people usually associate stocks with shares that are traded on stock exchanges and are publicly listed. But it's crucial for investors to be aware of the various kinds of stocks that are out there, comprehend what makes them special, and know when they might be a good investment. In an effort to clear up any confusion regarding the various stock classes available to investors, we have listed the various stock categories below.
Common and Preferred Stock
Common stock, also known as ordinary shares, represents a fractional ownership stake in a company. Investors holding common stock are entitled to a share of the company's generated profits, typically distributed in the form of dividends. Additionally, common stockholders have the authority to elect a company's board of directors and participate in voting on corporate policies.
In the event of liquidation, common stockholders hold rights to the company's assets, though they are prioritized after preferred stock shareholders and other debt holders have been satisfied. Common stock is commonly allocated to company founders and employees.
On the contrary, preferred stock, also referred to as preference shares, grants its holders priority in receiving regular dividend payments over common shareholders. In the case of a company dissolution or bankruptcy, preferred shareholders are repaid before common shareholders. Unlike common stock, preferred stock does not confer voting rights, making it an attractive option for investors seeking a stable source of passive income.
Many companies provide both common and preferred stock options. For instance, Alphabet Inc., the parent company of Google, has listings for Alphabet Inc. (GOOGL), representing its Class A common stock, and Alphabet Inc. (GOOG), representing its preferred Class C stock.
Growth Stocks vs. Value Stocks
As the name implies, growth stocks are stocks anticipated to experience faster-than-average growth compared to the overall market.
Typically, these stocks show strong performance during periods of economic growth and when interest rates are low. A prime example is the noteworthy outperformance of technology stocks in recent years, driven by a thriving economy and readily available low-cost funding.
To track growth stocks, investors can keep an eye on the specialized exchange-traded fund (ETF), such as the SPDR Portfolio S&P 500 Growth ETF (SPYG).
On the other hand, value stocks often have more attractive valuations than the overall market and trade at a discount to what a company's performance might otherwise indicate.3. Because they typically produce steady income streams, value stocks—such as those in the financial, healthcare, and energy sectors—tend to perform better during economic recovery periods. By adding the SPDR Portfolio S&P 500 Value ETF (SPYV) to their watchlist, investors can keep track of value stocks.
Income Stocks:
Income stocks are equities that offer regular income through the distribution of a company's profits or excess cash in the form of dividends, surpassing the market average. Typically, these stocks, such as those in the utilities sector, exhibit lower volatility and experience less capital appreciation than growth stocks. They are well-suited for risk-averse investors seeking a steady income stream. Exposure to income stocks can be gained through the Amplify High Income ETF (YYY).
Blue-Chip Stocks:
Blue-chip stocks are well-established companies with a substantial market capitalization. These companies boast a lengthy and successful track record of generating reliable earnings and leading their respective industries or sectors. Conservative investors often choose to overweight their portfolios with blue-chip stocks, especially during uncertain periods.
Examples of blue-chip stocks include industry leaders like Microsoft Corporation (MSFT), McDonald's Corporation (MCD) in the fast-food sector, and Exxon Mobil Corporation (XOM) in the energy industry.
Cyclical and Non-Cyclical Stocks:
Cyclical stocks are directly influenced by economic performance, typically following economic cycles of expansion, peak, recession, and recovery. They tend to display more volatility and outperform other stocks during economic upturns when consumers have greater discretionary income.
Examples of cyclical stocks include Apple Inc. (AAPL) in the technology sector and Nike, Inc. (NKE) in sports gear. Investors can integrate cyclical stocks into their portfolios through the purchase of the Vanguard Consumer Discretionary ETF (VCR).
Conversely, non-cyclical stocks operate in industries considered "recession-proof," performing reasonably well regardless of economic conditions. These stocks generally outperform during economic slowdowns or downturns due to consistent demand for core products and services.
The Vanguard Consumer Staples ETF (VDC) provides exposure to large-cap defensive stocks, including The Procter & Gamble Company (PG) in personal care, as well as beverage giants PepsiCo, Inc. (PEP) and The Coca-Cola Company (KO).
Defensive Stocks:
Defensive stocks offer consistent returns across various economic and market conditions. These companies typically provide essential products and services in sectors such as consumer staples, healthcare, and utilities. Defensive stocks can help safeguard a portfolio from significant losses during market downturns or bearish trends.
A defensive stock may fall into categories like value, income, non-cyclical, or blue-chip. Examples include Verizon (VZ) in telecommunications and Cardinal Health, Inc. (CAH) in healthcare, both included in the core holdings of the Invesco Defensive Equity ETF (DEF).
IPO Stocks:
When a company decides to go public, it releases shares through an initial public offering (IPO). These stocks are typically offered at a discounted rate before they are officially listed on the stock exchange. Additionally, there may be a vesting schedule in place to discourage investors from selling all their shares immediately after trading begins. Market commentators often refer to recently listed stocks as "IPO stocks," and investors can stay informed about upcoming IPOs through the Nasdaq website.
Penny Stocks:
Penny stocks are equities valued at less than $5, known for their high speculative nature. While some penny stocks trade on major exchanges, many are traded over-the-counter through the OTCQB market operated by OTC Markets Group. To navigate the unique challenges of penny stocks, investors are advised to use limit orders due to the significant spread between bid and ask prices.
The popularity of penny stocks rose notably after The Wolf of Wall Street depicted a former stockbroker involved in a penny stock scam. Investors interested in penny stocks may explore opportunities through the iShares Micro-Cap ETF (IWC).
ESG Stocks:
Environmental, social, and corporate governance (ESG) stocks prioritize environmental protection, social justice, and ethical management practices.
These stocks may include companies committed to exceeding national and industry targets for reducing carbon emissions or those involved in manufacturing equipment for renewable energy infrastructure. ESG stocks have seen increased interest, particularly among socially conscious millennials. Investors looking to incorporate ESG principles into their portfolio can consider the Vanguard ESG U.S. Stock ETF (ESGV).
In summary
Investors can manage risk in their portfolios and make more informed decisions about their investments by being aware of the key distinctions between different stock categories. Investors can obtain affordable exposure to themed stock types through exchange-traded funds (ETFs) in addition to purchasing various stock types directly.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.
