Stocks Simplified: 12 Types Of Stocks You Should Know About

When you hear “stocks,” you might picture fast-moving charts and unpredictable markets. But at its core, a stock is just a piece of ownership. Yet, not all stocks are created equal.

So, what is a stock, and what are the different types?

What Is A Stock?

A stock represents an ownership stake in a company. When you buy shares in a company, you become a shareholder – you own a piece of that company. 

The stocks you own entitle you to:

• A share of the company’s profits – Via dividends, if offered.
• Capital appreciation – If the stock price increases.
• Certain rights – Like voting on major company decisions.

Companies issue stock to raise capital (funds) for growth, operations or debt repayment. The first share issue occurs through an initial public offering (IPO), after which the shares trade on public exchanges like the London Stock Exchange.

How Are Stocks Classified?

Stocks can be grouped based on several factors. The most common ways they’re grouped are by:

Now, let’s explore each of these in detail.

Stocks By Ownership Rights

Common Stocks

Common stocks are the most widely known type of stock. When people talk about investing in stocks, they refer to common stocks. 

Some benefits of common stocks include:

• Capital appreciation as the stock price rises.
• Voting rights in annual general meetings.
• Dividends (though not guaranteed).

A significant drawback of owning common stocks is their position in bankruptcy proceedings. Owners of common stock are the last to be paid from the sale of company assets when they go bust.

While this drawback is significant, the benefits of common stocks tend to outweigh it.

Preferred Stocks

Preferred stocks are a hybrid of common stocks and bonds. They offer fixed dividends and have priority over common stockholders on two fronts:

• They receive dividends before common stockholders
• They are paid before common stockholders in bankruptcy proceedings

Despite the above benefits, preferred stockholders don’t get voting rights and have less potential for capital appreciation. 

Banks and utility companies are the usual issuers of preferred stock.

Stocks By Investing Strategy

Growth Stocks

These are stocks of companies expected to grow faster than the market’s average. Because they are focused on growth, investors buy them for capital appreciation, not dividends. 

They also have high price-to-earnings (PE) ratios because their profits aren’t currently keeping up with their upward stock price movement.

Value Stocks

Value stocks include all companies whose stock trades at a discount to their intrinsic value. They may be undervalued due to temporary performance setbacks or market-wide pessimism. 

Value stocks often:

• Have PE ratios that are below the company’s historical average
• Are more stable with predictable earnings and cash flows
• Pay a stable but rising dividend

Dividend (Income) Stocks

Dividend stocks are those from companies that pay dividends. Dividend-paying companies generate steady profits and distribute a reasonable percentage to shareholders.

Dividend stocks are often less volatile and best suited for income-focused investors. 

Stocks By Market Cap (Company Size)

Stocks are often categorised by the company’s size: market cap.

Market cap, short for market capitalisation, reflects the total value of a company’s shares. It’s calculated as follows.

Market Cap = Current Share Price x Total Shares Outstanding

Now, to the types of stocks.

Large-Cap Stocks

These are the heavyweights of the stock market. They are established, stable and widely followed. Large-cap stocks are often market leaders in their sectors and operate globally. 

To be a large-cap stock, the company must have a market cap of over £5 billion in the UK and $10 billion in the US.

Mid-Cap Stocks

These companies are usually in the growth phase. They grow revenue at high rates and are more agile than large caps. Mid-cap stocks are also more volatile than large caps but less so than small caps.

To be a mid-cap stock, the company’s market cap must be between £1 billion and £5 billion in the UK ($2 billion and $10 billion in the US).

Small-Cap Stocks

Small-caps are typically younger, more niche companies or regionally focused businesses. Because of their size, small-caps have higher growth potential, less predictable earnings and are more susceptible to economic swings.

To be a small-cap stock, the company must have a market cap lower than £1 billion in the UK ($2 billion in the US).

Stocks By Industry/Sector

Economies are divided into sectors, and sectors into industries. If a company is in the technology sector, its stock would be considered a technology stock.

By sector, UK stocks can be described using one of the following.

By sector, US stocks can be described using one of the following.

Stocks By Geography

Companies can also be grouped by geography relative to the investor’s location.

• Domestic Stocks – Companies based and listed in their home country.
• International Stocks – Companies based overseas but accessible via their local broker.
• Emerging Markets Stocks – Stocks in developing markets.

Rounding It All Up!

The stock market is full of opportunity, but not all stocks are created equal. Understanding the different types of stocks – from growth vs. value to small-cap vs. large-cap – helps you make better, more informed decisions.