What are the Types of Stocks?
Before knowing what types of stocks there are, we need to understand what a stock is. A stock, or equity, or share is an investor’s portion of a company’s ownership. Holding the shares of a company means becoming one of many such owners. A shareholder has a profit share, called dividend, and a share in the assets of the company.
Some shares give the investor voting rights. But this does not mean you get to influence the company’s decision-making process. Only one vote per share could be given for the election of the board of directors. Owning a share also does not entitle the investor either to advise the company CEO on how to run the company or to use the company’s product or services without payment.
Types of stocks
There are many parameters for defining a stock such as company size, location, and industry. But the most basic types of stocks are common stocks and preferred stocks.
As the name suggests, these are the most commonly available stocks. A common stock is what the definition of stock states: Issued to the public, they represent a particular company, earn a dividend, and give investors one vote per share. Most companies issue common stocks.
The prices of common stocks are highly volatile. Share prices move according to share market trends.
Their lower dividend percentage makes common stocks profitable for long-term investments. But the returns fluctuate depending on the company’s performance. If the company makes a profit, the dividend amount will increase. Similarly, a loss means a reduced dividend or no dividend at all.
Common stocks have minimum liability for the issuing company. If bankruptcy happens, common stockholders will be paid last, after creditors, bond holders, and preferred stockholders.
Preferred stocks give limited ownership to the investor. Generally, preferred stockholders do not get voting rights. These stocks also earn a guaranteed dividend. The dividends issued for preferred stocks are usually higher than those for common stocks.
Preferred stocks are also higher in value and less volatile. Even if the company is making losses or is up for liquidation, the preferred stockholder will get paid well before the common stockholder.
For investors looking to make gains in the short term, preferred stocks are the best option.
Other stock types
There can be further categories within common and preferred stocks:
- Market share: Depending on a company’s market share, its stock could be small-cap, mid-cap, or large-cap.
- Industry or sector: Stocks are marked by the industry the company operates in. These sectors are diverse such as the energy sector, technology sector, and the textile sector. Holding stocks from different sectors helps safeguard against total loss.
- Geo business strategy: Stocks can also be grouped by companies that do business with certain countries. An example could be a company that does business with the USA or an emerging market. The local politics and local events of the places where the company does business influence the stock prices.
- Growth or value: Some stocks are predicted to grow at a higher rate. These are known as the growth stocks. Again, some stocks are currently undervalued but are expected to fetch bigger returns in the long term. These are the value stocks.
Different classes of stocks
Companies may categorise their stocks in some other ways such as Class A and Class B. A common reason for this is to retain the voting rights with certain groups of people.
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