You would forgive the layman for thinking that there was only one type of stock, stock that is issued by companies. In reality though, there are several different types of stocks that investors can purchase and sell on the market. Let’s take a closer look at some of the intricacies of these varying stock types.
Common stocks vs preferred stocks
When referring to stocks, you will typically come across common and preferred stocks first.
A common stock is referred to as ordinary shares at times and represents a partial ownership in a company or corporation. Common shares can generate profit for investors in the form of dividends that are paid out by the corporation or company. Another perk of owning common stock in a company is that you have a right to vote for new board members or vote on corporate policies.
Should a company ever be liquidated, a common stockholder will have rights to the proceeds but only after the preferred stock shareholders and other debt holders are paid out.
As the name suggests, the preferred stock owners are going to receive preference over the common stockholders. Everything from standard regular dividend payments to when a company is liquidated will result in preferred stock owners being paid first. What preferred stock does not entitle the owners too is voting rights. You won’t have a say on the policies of the company or on who currently sits on the board. (1)U.S. Securities and Exchange Commission."Stocks."
Growth and Value Stocks
The concept is in the name of a growth stock, it’s a stock that the investor can expect to grow much faster than your average stock in the broader market. Growth stocks typically need certain conditions to thrive. You generally find that growth stocks thrive in periods where there are low interest rates and during economic expansion.
While growth stocks have outperformed value stocks in the last 10 years by almost 6%, value stocks still have a lot to offer. A value stock gives the investor a trade discount irrespective of how a company may be performing at the time. Value stocks are generally expected to generate steady income during periods of economic recovery. (2)State Street Global Advisors."SPDR Portfolio S&P 500 Growth ETF."
An income stock is an equity that bears lower volatility and less appreciation than your average growth stock. These stocks frequently provide income to investors through the distribution of company profits. This is done through dividends that are generally higher than the market average.
In short, income stocks are a great option for investors who are not looking to take on too much risk as they provide a reliable income stream.
Cyclical and Non-Cyclical Stocks
Where growth stocks thrive in periods of economic expansion and value stocks in periods of economic recovery, cyclical stocks follow all of the above. Cyclical stocks are affected by economic performance and will follow cycles of recovery, recession, peak and expansion. While cyclical stocks can display growth in a number of economic cycles, they are generally more volatile during periods of economic strength where investors have excess cash to spend.
Non-cyclical stocks are stocks that are perfect during slowdown or downturn economic cycles. They operate well in times of recession as they are not significantly affected by the whims of the economy. In short, where cyclical stocks operate well in times of economic strength, non-cyclical stocks perform in times of economic downturns.
A defensive stock is a great option for staving off significant losses in an investor’s portfolio. These stocks provide steady returns, operating well in most economic cycles. Defensive stocks are usually sold by companies that are involved with essential services like healthcare and utilities. A defensive stock is ultimately a broader term for some specific stocks. This means that a defensive stock can also be a blue-chip, value, income or non-cyclical stock.
When you think about blue-chip stocks, you are thinking about massive corporations that have significant market capitalization. For example, a blue-chip stock company would be companies like Microsoft, Tesla, Apple etc. These companies have a history of delivering steady earnings and of being industry leaders.
Anytime a company wants to take itself public they need to issue stock via an IPO or an initial public offering. Before the stock of these companies are listed on the exchanges, they are offered at discount prices. Investors will often refer to stock that has recently gone public on the market as IPO stock.
ESG or environmental, social, and corporate governance stocks are geared towards social justice, ethical practices in business and environmental protection. An ESG stock is a company with moral integrity. They may commit to certain ethical business practices or lowering carbon emissions.
Put simply, penny stocks are the very small fish in the proverbial financial pool. These stocks are never valued at more than $5. You’ll find a handful of penny stocks on the major markets but for the most part, these kinds of stocks are found with middle-tier exchanges like the OTCQB.
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