What Are The Different Types Of Stock To Invest In?

The stock market can be intimidating for new investors. Between the market volatility and the financial jargon that is thrown around regularly by commentators, it can be hard to know where to start investing in stocks. Fortunately, stocks aren’t as complex as they seem, and while there are many different categories of stocks, they all have a lot in common.

Here’s what you should know about these seven different types of stocks.

1. Common stock

Common stock is probably what you think of when you are looking to invest in stocks. Common stock gives you an ownership stake in the business with the ability to vote on key matters such as electing the board of directors or adopting certain company policies.

• When you buy a stock, you are purchasing a stake in a real business, and your long-term returns will be driven by the earnings and overall success of that company.
• Earnings growth will contribute to a higher share price for common stock owners and enable the company to share those earnings with shareholders in the form of dividends.
• Stocks also fall into broad market sectors: energy, materials, industrials, utilities, health care, financials, consumer discretionary, consumer staples, information technology, communication service and real estate.

2. Preferred stock

Meanwhile, preferred stock is more like a bond than a stock. Typically, you won’t have any voting rights, but you will receive dividend payments ahead of common stockholders. Preferred stock typically trades based on the income it can generate for investors, so it tends to be less volatile than common shares, but you may still see price appreciation if preferred shares are purchased at a discount to face value on secondary markets. Your return will come primarily from the dividends you receive.

• Preferred stock may be redeemed prior to maturity, and some preferred shares are convertible into a certain number of common shares.
• While the opportunity for significant gains is much lower with preferred stock than common stock, the risk is considerably lower, too.

3. Market cap

The universe of common stocks is quite large, so one way to divide it up is by categorizing companies based on their market capitalization, or the total value of all their outstanding shares.

Large-cap stocks

These are the companies we all know and use even if we don’t realize it. Take, for example, Mondelez (MDLZ), a Fortune 500 company that isn’t exactly a household name. Yet this food titan has a market cap of $79.7 billion and makes popular brands like Oreos, Ritz crackers and Philadelphia cream cheese.

• While there is no official definition of a large-cap stock, they are generally companies with market caps of $10 billion or more.
• Large-cap stocks are typically established companies with proven records of profitability, and the best of them are sometimes called blue chip stocks.
• Investors looking to invest in large-cap stocks might consider purchasing an index fund that tracks a large-cap index such as the S&P 500. This popular index includes well-known companies such as Apple, Microsoft and Walmart.

Mid-cap stocks

Mid-cap stocks may help to diversify your portfolio away from the large-cap stocks most people typically focus on. Broadly speaking, mid-cap stocks may come with less risk than small-cap stocks, but more risk than large-caps, although it will always depend on the specific company.

• As you move down in market cap, mid-cap stocks are next, and these companies typically have a valuation between $2 billion and $10 billion.
• These companies are established but may still be in the early stages of their growth and can come with the potential for meaningful price appreciation.
• Many of today’s large-cap stocks were once mid-caps before growing to new heights.

Small-cap stocks

Small-cap stocks can be one of the most rewarding areas of the market because they give you the opportunity to identify a company poised for future growth.

• Small-cap stocks typically have market caps of less than $2 billion and may still be in the early stages of their growth.
• Because of their modest size, small-cap stocks can sometimes be overlooked by fund managers, creating the potential to find hidden gems.
• The potential for high returns does come with greater risk, so it’s especially important to diversify when investing in small caps.

4. Growth stocks

Growth stocks are one of the most exciting areas of the stock market, but buying them and earning high returns isn’t as simple as the name suggests.

• Because high-growth companies can be very rewarding to investors, their prices can sometimes get bid up to overvalued levels where investors won’t earn satisfactory returns. But if you’re able to purchase a growth stock at a compelling price, you may be able to ride its success for many years to come.
• Companies like Apple, Alphabet and Tesla have all rewarded investors handsomely in recent years, but only time will tell if their growth can be sustained.
• Growth stocks are often presented as the opposite of value stocks, but growth can be undervalued by the market. Growth is merely a component of value.

5. Value stocks

Value stocks might be considered the less exciting cousin of growth stocks, but that doesn’t mean they’re any less rewarding for investors. Just as growth stocks can get bid up to unsustainable prices, other stocks can get beaten down to significantly undervalued levels.

• The definition of a value stock can vary widely, but when focusing on quantitative metrics, they tend to have lower valuation multiples and lower growth rates than growth stocks.
• Some of the world’s most successful investors, including Warren Buffett, have amassed their wealth by buying stocks below their intrinsic value.
• Be sure to understand the specifics of any stock you buy. Some stocks that look to be a bargain end up being cheap for a reason, and their business declines, dragging the stock price with it.

6. Dividend stocks

Beyond (ideally) growing in value, dividend stocks pay you a little something extra. Some companies pay part of their profits back to shareholders in cash as dividends, which can provide investors with regular income.

• Dividends are typically issued by large, established companies with steady earnings. Some of them have been paying out and steadily increasing for decades.
• Because these companies pay out some profits, their stock prices might grow more slowly compared to high-growth companies that reinvest earnings.

7. Foreign stocks

Foreign stocks are issued by companies that are based outside the United States. Some of these companies may trade on U.S. stock exchanges, but their revenues and profits are still generated mostly elsewhere.

• Most U.S. investors tend to hold companies that are headquartered in their home country, and for good reason. The U.S. has well-established capital markets and is home to some of the most successful companies in the world.
• However, adding international stocks to your portfolio can help diversify your investments and give you a stake in emerging companies around the world.

Bottom line

While there are many different types of stocks, they all represent stakes in actual businesses. No company is inherently a growth or value stock and will likely move between several different categories throughout its life. Always be sure to analyze the underlying business before purchasing a stock to get a sense of the company’s competitive position and valuation.

— Kim Husband contributed to an update of this story.