Types Of Stocks: Your Ultimate Guide

When it comes to investing in stocks, there are various types you need to be aware of. Understanding these different types of stocks can help you make educated investment/trading decisions, diversify your portfolio and hopefully get a great return.

In this article, we will explore the main types of stocks, preferred stocks, common stocks, and penny stocks, their unique characteristics, and the opportunities they present.

Key Takeaways:

  • There are different types of stocks, including stock options, preferred stocks, common stocks, and penny stocks.
  • Preferred stocks offer priority in dividend payments and assets in case of liquidation.
  • Common stocks represent partial ownership in a company and provide voting rights.
  • Penny stocks are low-priced stocks with high risk and volatility.

Common Stock: Ownership and Voting Rights

Common stock represents partial ownership in a company and provides shareholders with voting rights. As a common stockholder, you have the right to vote on important corporate policies and even elect the company’s board of directors. This means that you have a say in the decision-making process and can influence the direction of the company (depending on the size of your stake).

Common stockholders also have the potential to receive dividend payments. Dividends are a share of the company’s profits that are distributed to shareholders. It’s important to note that common stockholders may be at a lower priority in receiving dividends and assets in the event of liquidation compared to preferred stockholders.

Common Stock Preferred Stock
Ownership Partial ownership in the company Partial ownership in the company
Voting Rights Yes No (in most cases)
Dividend Payments Potential to receive dividends Priority in receiving fixed dividends
Priority in Liquidation Lower priority compared to preferred stockholders Higher priority compared to common stockholders

Preferred Stock: Dividend Payments and Priority

Preferred stock is a type of stock that offers unique features compared to common stock. One of the key advantages of preferred stock is the priority it gives to shareholders in receiving dividend payments. Unlike common stock, which may or may not pay dividends, preferred stock typically comes with a fixed dividend rate (yield). This means that preferred stockholders have a higher chance of receiving regular income in the form of dividends.

In addition to the regular dividend payments, preferred stockholders also enjoy a higher priority in receiving assets in the event of a company’s liquidation or bankruptcy. This priority provides an added layer of protection and can be appealing to investors who not only value stability but also have a large investment in the company.

Preferred stock does not generally come with voting rights. While common stockholders have the right to vote on important company matters, preferred stockholders do not have this privilege. However, the lack of voting rights is often offset by the consistent income stream and priority in dividend payments that preferred stock offers.  I hold many shares of different stocks and have never voted on anything so for many, either type of stock will suffice.

Penny Stock: Speculative and High-Risk Investments

Penny stocks are stocks with low share prices, typically valued at less than $5. These stocks are considered highly speculative and carry a high level of risk. Investing in penny stocks can be enticing due to the potential for significant returns, but it’s important to understand the risks that come with it.

penny stocks

Many penny stocks trade on the over-the-counter (OTC) market, which is a decentralized market that operates outside of major exchanges like the New York Stock Exchange or Nasdaq. The OTC market can have less regulation and liquidity, making it more susceptible to price manipulation and scams.

Penny stocks are known for their high volatility, meaning their prices can fluctuate dramatically in short periods. This volatility is caused by a few things such as the limited financial information available for these companies and the lower trading volumes. As a result, penny stocks can experience sudden price spikes as well as significant losses.

One famous penny stock crash was Cynk Technology Corp.  It started at .10 per share and soared to $21/share in 2014.  The company had no revenues and just one employee but had a market cap of over $5 billion at one point.  Eventually, it was over, and the founder ended up with a 12-year prison term.

Risks Associated with Penny Stocks

  • Lack of liquidity: Penny stocks often have low trading volumes, which can make it challenging to buy or sell shares at desired prices.
  • Limited information: Companies trading as penny stocks may not be required to disclose the same level of financial information as companies listed on major exchanges. This lack of transparency can make it difficult for investors to assess the true value and potential of these stocks.  Cynk trades were done over the phone!
  • High potential for fraud: Penny stocks are sometimes associated with fraudulent activities, such as pump and dump schemes, where individuals artificially inflate the stock price before selling their shares for a profit.
  • Higher risk of loss: The high volatility and lack of liquidity can expose investors to significant losses if the stock price declines rapidly or if they are unable to sell their shares at a favorable price.

Given the risks associated with penny stocks, you must take caution and conduct due diligence before risking your money. This may involve analyzing the company’s financials and understanding its business model.  If you can’t find this information, stay away.

Growth Stocks vs. Value Stocks: Different Investing Strategies

When it comes to investing in stocks, there are two primary strategies that investors often consider: growth stocks and value stocks. These strategies are different in approach and potential returns, offering you the opportunity to tweak your portfolio based on your goals and risk tolerance.

Growth stocks are shares of companies that are expected to experience significant growth in the future. These companies typically reinvest their earnings into expanding their business, rather than distributing dividends to shareholders (or very low yield). As a result, growth stocks often have higher price-to-earnings (P/E) ratios compared to other stocks.

Investing in growth stocks can be a high-risk, high-reward approach, as the potential for future growth can result in substantial capital gains. Growth stocks can be volatile and may experience periods of underperformance so ensure you are scanning and choosing the best of the best.

Value stocks are shares of companies that are considered undervalued based on their fundamentals, such as their P/E ratios or book values. These stocks are often associated with more mature companies that may have slower growth rates compared to growth stocks. Value stocks tend to be more stable and less volatile, making them attractive to investors seeking a conservative approach. Value stocks also have the potential to provide a steady income stream through dividends.

Comparing Growth Stocks and Value Stocks

To better understand the differences between growth stocks and value stocks, let’s compare:

Growth Stocks Value Stocks
Higher potential for capital gains Lower potential for capital gains
Higher P/E ratios Lower P/E ratios
Lower or no dividend payments Potential for steady dividend income
Higher volatility Lower volatility

As an investor, you can choose to incorporate both growth stocks and value stocks in your portfolio to find a balance between potential growth and stability. The optimal allocation will depend on your investment goals, risk tolerance, and time horizon. Always regularly review and reassess your investments to ensure they are in line with your financial goals.

Blue-Chip Stocks: Stable and Established Companies

Blue-chip stocks are often a popular choice for both experienced investors and those new to the market. Blue-chip stocks are shares of well-established companies with a large market capitalization. These companies have a long track record of generating consistent earnings and are considered by many to be stable investments (although anything can happen).

BLUE CHIP STOCKSInvesting in blue-chip stocks is like putting your money into companies that have proven their ability to withstand market swings and economic downturns that occur. These companies have established themselves as industry leaders, often with a global presence and a diverse range of products or services. Examples of blue-chip stocks include technology giant Microsoft, fast-food chain McDonald’s, and energy company Exxon Mobil.

One of the main advantages of investing in blue-chip stocks is their ability to provide stable returns over the long term. These stocks usually offer a combination of regular dividend payments and potential capital appreciation. Dividend payments can provide you with a steady income stream, while capital appreciation allows for potential growth in the value of the stock over time.

Furthermore, blue-chip stocks are generally seen as a safer option during times of economic uncertainty. Due to their strong market position and solid financial performance, these companies are often better equipped to weather economic downturns compared to smaller or less established companies. This stability can provide investors with peace of mind and confidence in their investment decisions regardless of the economy.

Income Stocks: Regular Dividend Payments

Income stocks, also known as dividend stocks, are a popular choice for investors seeking regular dividend income and stability in their portfolios. These stocks belong to companies that have a track record of generating consistent cash flow and are considered less volatile compared to growth stocks. By investing in income stocks, you can receive regular income in the form of dividend payments, providing you with a steady stream of passive income.

DIVIDEND STOCKS

Dividend income can be particularly appealing to retirees or risk-averse individuals who rely on a consistent income stream. Income stocks are often found in industries such as utilities, consumer staples, and real estate investment trusts (REITs). These sectors tend to have stable business models and generate reliable cash flow, allowing them to distribute a portion of their profits through dividend payments.

When selecting income stocks, it is important to consider factors such as the company’s dividend history, payout ratio, and financial health. A company with a long history of increasing dividend payments and a low payout ratio may indicate a stable and sustainable dividend income. In the US, one popular approach to finding dividend stocks is “Dogs of the DOW“.  This focuses on high-yielding stocks and can be a simple and objective way to find these income stocks.

Large-Cap vs. Small-Cap Stocks: Size Matters

When it comes to investing in stocks, one important factor to consider is the size of the companies you are investing in. Stocks can be categorized based on their market capitalization, which represents the total value of a company’s outstanding shares. The two main categories are large-cap stocks and small-cap stocks, each with its own characteristics and investment opportunities.

Large-Cap Stocks Small-Cap Stocks
Definition Shares of companies with a market capitalization of $10 billion or more Shares of companies with a market capitalization below $2 billion
Risk Lower risk compared to small-cap stocks Higher risk compared to large-cap stocks
Growth Potential Stable growth potential Higher growth potential
Volatility Less volatile compared to small-cap stocks Higher volatility compared to large-cap stocks
Investor Profile Conservative investors seeking stability and regular dividends Investors seeking higher returns and willing to take on more risk

Large-Cap Stocks

Large-cap stocks are shares of companies with a market capitalization of $10 billion or more. These companies are well-established, stable, and have a long track record of success. Some examples of large-cap stocks include Apple, Amazon, and Microsoft. Large-cap stocks are considered to be less risky and more stable compared to small-cap stocks. They are often seen as safer investments, especially in times of economic uncertainty. Large-cap stocks tend to attract more conservative investors who are looking for steady growth and regular dividend payments.

Small-Cap Stocks

Small-cap stocks have market capitalizations below $2 billion. These stocks represent shares of relatively smaller companies that are still in their growth phase. Small-cap stocks can offer higher growth potential compared to large-cap stocks. They also come with higher volatility and risk. Investing in small-cap stocks requires a higher tolerance for risk and a longer investment horizon. Examples of small-cap stocks include Etsy, Datadog, and Carvana. Small-cap stocks can be attractive to investors who are seeking higher returns and are willing to take on more risk.

SMALL CAPChoosing between large-cap and small-cap stocks depends on your investment goals, risk tolerance, and time horizon. Large-cap stocks offer stability and lower risk, while small-cap stocks offer higher growth potential but come with higher volatility. It’s important to diversify your portfolio and include a mix of large-cap and small-cap stocks to balance risk and potential returns.

IPO Stocks: Newly Public Companies

An initial public offering (IPO) occurs when a private company decides to go public and offers its shares to the general public for the first time. IPO stocks can generate a lot of buzz and potential for growth, but they also come with risks and uncertainties.

Pros of Investing in IPO Stocks Cons of Investing in IPO Stocks
  • Potential for significant capital gains if the company succeeds
  • Opportunity to invest in innovative and promising companies
  • Access to shares before they become publicly traded
  • High volatility and price fluctuations
  • Risk of investing in unproven or speculative companies
  • Limited historical data for analysis and evaluation

When investing in IPO stocks, it’s essential to consider factors such as the company’s business model, competitive landscape, and growth prospects. Conducting thorough research and due diligence is crucial to make informed investment decisions. IPO stocks are often subject to market speculation and can be highly volatile in the early stages of trading so be diligent with your risk management.

Not all IPO stocks perform well in the long run. Some companies may experience significant price swings or struggle to meet market expectations. As an investor, carefully assess the risks and potential rewards before investing in IPO stocks. Diversification is also key, as investing solely in IPO stocks can expose your portfolio to excessive risk.

As with any investment, it’s crucial to assess your risk tolerance and investment goals before investing in IPO stocks. If you’re unsure about navigating the IPO market, consulting with a financial advisor can provide valuable insights and guidance tailored to your specific needs.

Risks and Opportunities in IPO Stocks

Here are some key factors to consider if considering IPO stocks:

  • Market Speculation: IPO stocks often attract attention and market speculation, which can lead to significant price fluctuations in the early days of trading. Consider the level of risk you are comfortable with and whether you have the patience to weather short-term volatility.
  • Growth Potential: IPO stocks represent companies that are in the early stages of their growth trajectory. Assess the company’s business model, market potential, and competitive advantage to evaluate its growth prospects over the long term.
  • Company Fundamentals: Evaluate the financial health and fundamentals of the company before investing in its IPO. Look for factors such as revenue growth, profitability, and a strong management team.
  • Industry Analysis: Consider the industry the company operates in and its future prospects. Assess the market size, competitive landscape, and potential regulatory or technological disruptions that may affect the company’s growth.

Remember that investing in IPO stocks should be part of a well-diversified portfolio strategy that aligns with your risk tolerance and long-term investment objectives.

Conclusion

Understanding the different types of stocks is important for making informed investment decisions. Whether you are considering common stock, preferred stock, penny stock, growth stocks, value stocks, blue-chip stocks, income stocks, large-cap stocks, small-cap stocks, or IPO stocks, each type has its own unique characteristics and risks.

When building your investment portfolio, it is crucial to consider your investment goals and risk tolerance. For those seeking potential high returns and are comfortable with volatility, growth stocks may be a suitable option. If stability and regular income are your priority, income stocks or blue-chip stocks may be a better fit.

Investors should also take into account the market capitalization of stocks. Large-cap stocks are generally more stable, while small-cap stocks have higher growth potential. Additionally, IPO stocks can offer exciting opportunities but can also come with increased volatility.

FAQ

What are the different types of stocks?

The main types of stocks include common stock, preferred stock, penny stock, growth stocks, value stocks, blue-chip stocks, income stocks, large-cap stocks, small-cap stocks, and IPO stocks.

What is common stock?

Common stock represents partial ownership in a company and provides shareholders with voting rights and the potential to receive dividend payments.

What is preferred stock?

Preferred stock gives holders priority in receiving fixed dividend payments and assets in the event of a company’s liquidation or bankruptcy, but usually does not come with voting rights.

What are penny stocks?

Penny stocks are stocks with low share prices, usually valued at less than $5, and are considered highly speculative and risky.

What are growth stocks and value stocks?

Growth stocks are stocks of companies expected to grow at a faster rate than the overall market, while value stocks are considered undervalued based on their fundamentals.

What are blue-chip stocks?

Blue-chip stocks are shares of well-established companies with a large market capitalization, known for their consistent earnings and stability.

What are income stocks?

Income stocks, also known as dividend stocks, provide regular income to investors through dividend payments and are usually from companies with stable cash flow.

What is the difference between large-cap and small-cap stocks?

Large-cap stocks have a market capitalization of $10 billion or more and are generally considered more stable, while small-cap stocks have market capitalizations below $2 billion and have higher growth potential but also higher volatility.

What are IPO stocks?

IPO stocks are shares of companies that have recently gone public through an initial public offering, and can be exciting but also volatile investments.

How should I choose the types of stocks for my investment goals?

Selecting the right types of stocks for your investment goals and risk tolerance is crucial for building a well-diversified portfolio. It is always recommended to consult with a financial advisor before making any investment decisions.



Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.