Different Types of Stocks

Investing in stocks is a popular types of investments, but stocks are generally considered a high-risk investment. 

As such, it’s important to understand how investing in stocks works before you take the plunge.

You should also know that there are different types of stocks available. As an investor, it’s your job to learn about your options and determine which is right for you.

If you’re considering investing in stocks, here’s what you need to know about all the different types of stocks and how they work. 

• Why Are There Different Types of Stocks?
• Classes of Stock Explained
• What Are the Different Types of Stocks?
• Which Types of Stocks Should You Invest In?
• Make Informed Decisions About Stock Investments

Why Are There Different Types of Stocks?

You might be wondering “why there are different types of stocks?” One of the main reasons there are different types of stocks is because it allows companies to issue specific options for unique groups of investors. 

Key investors can get preferred stocks, which allows them to receive dividend payments. While certain types of stocks can limit your potential return, they can also limit your potential losses.

Companies are also required to fulfill different obligations for preferred stockholders. If a company fails, their obligations to preferred stockholders must be met before obligations to common stockholders. However, bondholders are typically reimbursed before preferred stockholders.

Classes of Stock Explained

In addition to preferred and common stock, companies may also offer different classes of stock denoted by different letters of the alphabet. 

For example, a company may offer class A stock, class B stock, and so on. These different classes of stock play an important role in how the stock market works.

Different classes of stock may be reserved for certain groups of investors, and they may be sold at different prices. 

Classes of stock may also offer different dividend policies, which means dividend payments can vary based on the type of stock you own. 

Because of this, it’s important to understand the different types and classes of stock and how they can affect dividends and stock prices.

What Are the Different Types of Stocks?

As an investor, it’s important to understand the various ways you can invest and the pros and cons of each investment opportunity. From penny stocks to growth stocks, there are several different types of stocks you can invest in. 

In this next section, we’ll talk about some of the key components of each type of stock, as well as who each type of stock might be well-suited for.

Here’s a list of the stock types we’ll be discussing:

• Common Stock
• Preferred Stock
• Growth Stocks
• Value Stocks
• Penny Stocks
• Defensive Stocks
• IPO Stocks
• ESG Stocks
• Income Stocks

Common Stock vs. Preferred Stock

A preferred stockholder has a priority of claims against corporate assets in the event the company declares bankruptcy and reorganizes. As assets are liquidated, payments go first to creditors and bondholders; then preferred stockholders are paid and, last of all, common stockholders.

Dividends to preferred stockholders are different as well, often a contractual obligation. Common stock dividends are determined by the board of directors each year. These differences make preferred stock a sort of hybrid between a bond and a stock.

The common stockholder, on the other hand, is more likely to make profits from stock price appreciation than with preferred stock. Common stock moves as market conditions change, making common stock investing the default choice for many.

Common stock also pays dividends as declared each year, with quarterly ex-dividend date (the date when stockholders of record earn a dividend) and payment date (about one month later).

A second benefit is that as a common stockholder, an investor has the right to vote for members of the board, with each share representing one vote in most cases.

• Which kind of stock should you buy?

It’s a matter of how much risk you can afford to take, versus how much profit potential you seek.

A very conservative investor will be drawn to the seniority of preferred stock over common stock, while recognizing that this safety comes with much lower profit potential. Essentially, preferred stockholders accept the guaranteed but relatively low-yield dividend.

A moderate investor will find common stock more appealing because of its potential for growth in value, and should be willing to live with market risk. The risks of common stock are mitigated by paying attention to the capital strength of the issuing company. Thus, common stock in a large cap company is going to be safer than that of a small cap company. However, the profit potential (and market risk) of the smaller company is going to be greater.

Picking the right company and the right kind of stock is determined by risk tolerance as well as your knowledge and experience. It is always a balancing act between two opposing forces: profit/loss potential, versus safety.

Growth Stocks vs. Value Stocks

Growth stocks are stocks that are projected to grow at a faster rate than average. 

These stocks generally perform better when the economy is expanding and interest rates are low. For example, technology stocks have significantly outperformed projections in recent years. 

These stocks can be tracked using the SPDR Portfolio S&P Growth ETF.

Value stocks, on the other hand, trade at a lower value than you might expect based on the performance of a company. These stocks tend to perform better during economic recovery, and you can track them with the SPDR Portfolio S&P Value ETF.

Penny Stocks

Penny stocks are stocks with a value of $5 or less, which means investors can purchase more stocks at a lower price. While penny stocks are cheaper, they’re also considered a high-risk investment because the companies behind these stocks often have serious financial problems. 

Penny stocks are typically traded over the counter in small volumes. While these stocks provide the opportunity to invest with less capital, it’s important to consider the risks.

Defensive Stocks

Defensive stocks typically perform well in a wide range of economic conditions. A big reason for this is that the companies behind defensive stocks often sell essential products and services. These stocks include AT&T Inc. and Cardinal Health, Inc.

IPO Stocks

Companies generally offer IPO stock at a discounted price before their stock is listed on the stock exchange. IPO stocks often have a vesting schedule that prevents stockholders from selling as soon as the stock as listed on the market. 

The NASDAQ website allows you to keep an eye out for upcoming IPO stocks that you might want to invest in.

These stocks aren’t usually seen as short-term investments, they are typically used as part of a long-term investment strategy.

ESG Stocks

Environmental, social, and corporate governance (ESG) stocks are focused on things like:

• Environmental protection
• Ethical management
• Social justice

This may include companies that are pledging to rapidly reduce carbon emissions or focus on renewable energy sources.

ESG stocks are popular among socially-conscious investors who want to invest in something they support.

Income Stocks

Rather than earning money through stock price appreciation, income stocks allow you to earn money through payments made by a company. 

Companies with low volatility and appreciation may have additional revenue that can be distributed to shareholders. These shareholders take on less risk in exchange for smaller, more frequent payments.

If you’re a beginner to investing or you’re particularly risk-averse, you may want to consider income stocks.

Which Types of Stocks Should You Invest In?

One of the biggest keys to investing is choosing the right investments for your financial situation. So, which types of stocks should you invest in?

It’s important to consider your risk tolerance when it comes to investing in stocks. If you’re not willing to risk a lot, you might want to consider historically low-risk investments that offer smaller returns. 

You may also want to consider how much capital you have to invest because certain investments are more accessible for low-capital investors.

There’s no sure way to come out on top with investments, but you can do your due diligence to improve your understanidng of the different types of stocks you might invest in. If you’re not sure what type of stock is right for you, a financial advisor can help you choose.

Make Informed Decisions About Stock Investments

Just because investing is accessible doesn’t mean it’s easy. There are several different types and classes of stocks, and the type of stock you invest in determines your risk and your potential return. It’s important to do your research, so you can make an informed decision about the different types of stock investments.

If you need help monitoring your investment performance, Mint can help. With Mint, you can easily track your investments in one convenient place, so you can see how well each investment is performing and track your entire portfolio. Try Mint today to make managing your finances easier.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

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