Lesson 3: Types of Stocks – Napkin Finance

Lesson 3: Types of Stocks

Thousands of companies sell stocks. This can make it difficult to decide what kind of stock to buy, especially for new investors. To help make sense of what’s out there, stocks can be sorted in various ways:

  • Common vs. preferred
  • Domestic vs. international
  • By sector or industry
  • By company size
  • By investment characteristics

Let’s look at what each of those categories means.

Common vs. preferred

There are two main types of stocks: common and preferred. When investors or the media talk about “stocks,” they’re usually referring to common stocks.

Common stockholders can receive dividends from the company and can vote on issues related to the company’s business at shareholder meetings. Preferred stockholders usually don’t have voting rights, but they receive dividends first and have a better claim on a company’s assets if it ever goes bankrupt.

Domestic vs. international

Another way to sort stocks is by where the company is based. Just like it sounds, domestic companies are based in the U.S., and international companies are based abroad. Investors often divide international stocks into even more categories—based on region or on a country’s level of economic development.

Sector or industry

In this method of sorting, companies are grouped by their type of business. For example, sorting companies by sector could give you these groupings:

  • Consumer discretionary
  • Consumer staples
  • Energy
  • Financials
  • Healthcare
  • Industrials
  • Materials
  • Real estate
  • Technology
  • Telecommunications
  • Utilities

Looking at stocks by sector can help investors compare similar companies. If you want to buy stock in the healthcare sector, you could compare that group of stocks and look for the one with the fastest-growing profits or pick a favorite based on another metric.

Investors may also want to make a bet on a whole sector at once. In some years, technology stocks will perform best as a group, while in other years energy stocks (or another sector) may dominate.

Company size

Stocks can also be classified by the size of the company issuing the stock. One way investors can rank companies by size is by considering their market capitalization, which is the total value of all of a company’s shares (calculated as the number of shares multiplied by the stock price).

Larger companies are generally more established and less risky but also often show lower growth. Here are the main groupings investors tend to use:

Type Market capitalization Description
Large-cap More than $10 billion Slower and steadier
Mid-cap $2 billion to $10 billion Moderate growth and moderate risk
Small-cap $300 million to $2 billion Higher growth and higher risk
Micro-cap Less than $300 million Up-and-coming companies; very risky

Investment characteristics

Stocks can also be broken down according to how investors expect to earn a return:

Type Description
Growth Companies with fast-growing profits (think Facebook in its early days). Investors expect the stock price to keep climbing higher as profits keep rising.
Income Companies that pay high dividends or that regularly increase their dividend payments (usually established companies). Investors expect to earn a return from dividends but may not expect big price increases.
Value Companies that have low stock prices compared with their profits (investors say these companies are “selling at a discount”). Even if a company’s profits don’t rise much, investors may expect its stock price to rise.
Blue-chip Large, well-established companies that have a history of steady growth and usually pay dividends.

Often, an investor has a preferred strategy for choosing stocks from one or more categories according to one or more classification systems. Picking different stocks from different groupings is a type of diversification. Experts recommend diversifying as a way to better protect your portfolio from market highs and lows.

“When the tide goes out, you see who’s swimming naked.“

—Warren Buffett

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