Even as a novice, I’m sure you have heard of the different types of stocks. It usually goes along with that golden rule in investment: diversification.
Different types of stocks reflect a variety of potential development, risk, and strategy opportunities. The stock market offers a mosaic of options adapted to varied investment appetites, ranging from cyclical stocks that ebb and flow with the economy’s tides to sturdy non-cyclical that weather crises with tenacity.
If you are new to this, don’t feel intimidated. I will walk you through all the different types of stocks you can consider as your option. After all, understanding the various sorts of stocks is critical in making informed financial decisions, whether venturing into new investment seas or strengthening your previous knowledge.
Now, let’s get into one of the most obvious types of stocks you will most likely encounter: dividend vs non-dividend stocks.
Table of Contents
Dividend Stocks vs Non-dividend Stocks
Dividend Stocks
When you purchase dividend stocks, you will receive a portion of the company’s income to shareholders as dividends. Different companies pay dividends in different forms. While some might be paid in cash, others might be extra shares of stock.
Established organisations with reliable profit streams usually pay dividends because they have adequate funds to pay to shareholders after covering all operational costs and expansion initiatives.
Non-dividend Stocks
Conversely, non-dividend stocks are the types of stocks from a company that does not pay dividends. Instead of dispersing profits, these businesses usually reinvest them in the company for expansion, research, or debt reduction.
They frequently work in industries with strong development potential, such as technology or new markets.
| Dividend Stocks | Non-dividend stocks | |
| Pros |
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| Cons |
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| Feature | Dividend Stocks | Non-dividend stocks |
| Income Potential | Dividend payments regularly | There will be no dividends |
| Capital Appreciation | Medium to low | Potentially significant |
| Risk Profile | Lower | Higher |
| Typical Companies | Companies that are well-established and mature | In their early stages of development |
| Usage of Profits | Shareholders are paid | Invested in the company |
| Appeal for Investors | Income generation | Capital expansion |
Individual investor preferences, risk tolerance, and investing goals all influence the decision between dividend and non-dividend stocks. While dividend stocks give constant income and potential tax benefits, non-dividend stocks entice investors with the promise of fast growth.
Remember: a well-diversified portfolio may include a mix of both types of stocks to balance consistent income and growth.
Cyclical Stocks vs Non-cyclical Stocks
Cyclical Stocks
Cyclical stocks are stocks whose performance and stock price are directly influenced by the state of the economy. These types of stocks tend to do well while the economy is expanding and struggle when the economy is contracting.
Companies in the automotive, travel, and luxury goods sectors are common examples. Their fortunes change with consumers’ discretionary spending habits, which are affected by the state of the economy.
Non-cyclical Stocks (or Defensive Stocks)
Non-cyclical or defensive stocks provide goods and services that are constantly in demand, regardless of the status of the economy. Their performance is less affected by business cycles.
Companies that provide life necessities, such as utilities, healthcare, and consumer staples, usually fall under this category. People still need these products or services to survive, whether the economy slumps or grows.
| Cyclical Stocks | Non-cyclical Stocks | |
| Pros |
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| Cons |
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| Feature | Cyclical Stocks | Non-cyclical Stocks |
| Reaction to Economic Cycles | Highly sensitive | Less sensitive |
| Performance | Best when the economy is expanding | Throughout the economic cycle |
| Volatility | Higher | Lower |
| Typical Sectors | Automobiles, travel, and high-end products | Utilities, healthcare, and consumer goods |
| Investor Appeal | During booms, there is a high possibility for returns. | During downturns, stability and defensiveness are essential. |
Investing in both cyclical and non-cyclical stocks can be a wise strategy. While cyclical stocks offer larger returns during economic upswings, non-cyclical companies provide a cushion and consistent performance during economic downturns.
A well-balanced portfolio can help investors through both prosperous and difficult economic times.
Common Stocks vs Preferred Stocks
Common Stocks
Common stocks indicate a company’s ownership and a claim on a portion of its revenues. Common stockholders wield power by electing a board of directors and voting on business policies.
Besides, common shareholders receive dividends when a corporation shares profits, but they are not guaranteed. In liquidation, common stockholders are last in line to receive any remaining assets, behind creditors, bondholders, and preferred shareholders.
Preferred Stocks
Preferred stocks are the types of stock that has a larger claim on assets and earnings than common stock. Dividends are paid to preferred shareholders before common shareholders, normally set and sometimes cumulative.
Companies that fail to pay dividends will owe preferred shareholders the payment in the future. As a result, In terms of liquidation, preferred stockholders wield more power over the company’s assets than common stockholders.
However, unlike common stocks, preferred stocks usually do not allow the investor to meddle in the company’s governance and management.
| Common Stocks | Preferred Stocks | |
| Pros |
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| Cons |
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| Feature | Common Stocks | Preferred Stocks |
| Dividend Priority | Following preferred shareholders | Before common shareholders |
| Voting Rights | Typically have | Usually none |
| Claim on Assets | During liquidation, you are the last in the queue. | Before common, but after debt |
| Dividend Consistency | Not guaranteed and subject to change | Generally fixed, but occasionally cumulative |
| Conversion | It is not possible to convert | Some is convertible to common stock. |
An investor’s portfolio should include both common and preferred stocks. While common stocks have greater growth potential, preferred stocks give stability and dependable income.
Depending on an investor’s risk tolerance and financial goals, they may choose a combination of the two different types of stocks to combine growth potential with consistent returns.
Growth Stocks vs Value Stocks
Growth Stocks
Growth stocks are companies predicted to grow their revenue and earnings faster than the rest of the market. These types of stocks rarely pay dividends since corporations frequently reinvest the money to accelerate growth.
On average, growth stocks have higher price-to-earnings (P/E) ratios and are largely appealing due to the possibility of significant price increases.
Value Stocks
Value stocks are issued by companies that are thought to trade at a discount to their intrinsic or fundamental value. These stocks are regarded as cheap in comparison to their intrinsic value. Value companies frequently have lower P/E ratios and may pay dividends.
They are cheap for various reasons, but their financial indicators signal long-term stability.
| Growth Stocks | Value Stocks | |
| Pros |
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| Cons |
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| Feature | Growth Stocks | Value Stocks |
| Earnings Reinvestment | Frequently reinvested for future growth. | Dividends could be paid out. |
| Price-to-Earnings (P/E) Ratio | High | Low |
| Current Valuation | Frequently seen as overpriced. | Seen as undervalued. |
| Dividend Payouts | Rarely | Common |
| Investor Appeal | High capital appreciation potential. | Bargain prices and the possibility of a market correction favour. |
When deciding between growth and value stocks, it’s critical to remember that these distinctions are not absolute.
A growth stock can become a value stock over time, and vice versa. Furthermore, if you are an astute investor, you should frequently mix these two different types of stocks to balance high-reward potential with solid, discounted assets.
Read also: 10 Best Long-Term Stocks to Buy and Hold Forever
Blue Chip Stocks vs Penny Stocks
Blue Chip Stocks
Blue chip stocks are usually from well-established, significant enterprises with a track record of stability, dependability, and performance.
They are frequently leaders in their respective industries, with consistent earnings, large market capitalisation, and, in many cases, a history of dividend payments. The word “blue chip” comes from poker, where blue chips are the most valuable.
Penny Stocks
Penny stocks are shares of small companies that trade at extremely low prices, frequently outside of larger market exchanges. They are regarded as highly speculative.
Often, you can find these stocks for less than $5 per share.
| Blue Chip Stocks | Penny Stocks | |
| Pros |
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| Cons |
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| Feature | Dividend Stocks | Non-dividend stocks |
| Share Price | High | Low (often under $5) |
| Market Capitalization | Large | Small |
| Dividend Payouts | Common | Rare |
| Financial Reporting Standards | Strict (major exchanges) | Less stringent (often OTC) |
| Volatility | Generally low | High |
| Liquidity | High | Often low |
| Public Information | Abundant and transparent. | Limited and frequently less trustworthy. |
Blue chip and penny stock investors often approach them with different tactics and risk tolerances.
Blue chip stocks provide stability and are frequently the foundation of a long-term investment strategy.
On the other hand, penny stocks are speculative plays that can provide big profits but also carry significant dangers. However, there are several best penny stocks in 2023 you should consider.
ESG Stocks
ESG is an acronym for Environmental, Social, and Governance. ESG stocks are stocks of firms that prioritise and demonstrate strong practices in these three areas.
As you can already tell, ESG investors are concerned with the societal impact of their investments and the financial return.
Environmental
This criterion examines how well a corporation manages the natural environment. Concerns such as carbon emissions, waste management, clean energy optimisation, etc., are what investors care about the most.
Social
This indicator measures how successfully a corporation maintains good relations with its employees, vendors, consumers, and local communities. Workplace harmony, multiculturalism, respect for human rights, and consumer safety are among the subjects discussed.
Governance
This section addresses a company’s leadership, executive compensation, audits, internal controls, and shareholder rights.
Investors increasingly recognise the long-term value and stability of ESG-compliant companies, believing they are better positioned to deal with shifting societal problems and legislative adjustments.
Have You Heard of Hydrogen Stocks?
Yes. Hydrogen stocks are now slowly becoming the focus of many investors, especially those who invest in ESG stocks. As the general public grows more favourable towards clean energy, so it is towards companies trying to produce clean energy with hydrogen.
Investing in hydrogen stocks corresponds to the “E” or environmental part of ESG, as these firms contribute to developing sustainable energy solutions and reducing carbon footprints. Because of the emergence of hydrogen as a promising renewable energy source, these stocks have the potential to be big players in the ESG investment landscape.
I have talked about several best hydrogen stocks in 2023. Don’t miss out on this golden opportunity for your potential investment.
Stocks by Capital
There is one distinction you need to make when categorising the stocks available on the financial markets: market capitalisation, often known as market cap. It’s the sum market value of a company’s outstanding shares of stock.
You can calculate a company’s market cap by dividing the stock price by the total outstanding shares.
This classification assists investors in determining a company’s size, risk, and prospective growth of different types of stocks.
Large-Cap
Large-cap stocks are usually market titans, representing corporations with market capitalisations often exceeding $10 billion. These stocks are generally regarded as the backbone of many investing portfolios due to their overwhelming influence in the industry.
Due to their size and power, they are frequently more resilient during economic downturns, providing stability that many investors find comforting. Aside from stability, many large-cap firms are known to reward shareholders by delivering dividends due to their constant profit paths.
Large-cap stocks are a popular choice for investors seeking a blend of growth and security due to their potential for regular income and relative stability.
Furthermore, considering their operations frequently span the globe, these organisations benefit from diverse revenue streams, further buffering them against localised economic issues. Their market significance assures high liquidity, allowing investors to trade these stocks easily.
Additionally, due to their importance in the economy, large-cap stocks receive substantial attention from financial analysts, guaranteeing investors have access to a wealth of information. Apple and Microsoft, for instance, are two stocks with enormous market power and leadership.
Mid-Cap
Navigating the spectrum of types of stocks, mid-cap stocks constitute an attractive middle ground between the market’s titans and its developing competitors. These stocks correspond to corporations with market capitalisations ranging from $2 billion to $10 billion.
Mid-cap companies, as opposed to large-cap corporations, frequently have greater growth potential, enticing investors seeking significant financial appreciation. At the same time, they have a longer track record, providing more stability than the young small-cap category.
Mid-cap stocks are defined by their combination of growth and relative stability. While they may have a different worldwide reach or extensive analyst coverage than large-cap companies, they usually operate in quickly growing areas or industries, providing significant potential for investors to capitalise on new trends.
Furthermore, mid-cap stocks may occasionally pay dividends, albeit less consistent than larger corporations pay.
They are the types of stocks that frequently provide investors with a harmonious balance: a sector where companies have pushed past the initial problems of their early days while being agile enough to adapt, develop, and expand.
Low-Cap
Most low-cap stocks has a market value of less than $2 billion. These enterprises, which exude vivid energy, are frequently overflowing with potential but also burdened with hazards in their early phases.
The attractiveness of small-cap stocks stems from their significant growth opportunities. Companies that issue these types of stocks have the potential for rapid development and impressive profits, as they may be pioneers in undeveloped areas with innovative goods.
However, this possibility is offset by higher volatility. Low-cap companies are prone to market volatility, making them a wild ride for investors.
Their small size suggests firms lack the financial sturdiness to weather economic downturns or business changes. Furthermore, these companies may be less liquid than their mid- or large-cap counterparts, and extensive analyst coverage may be limited.
Stocks by sectors
Another important factor to consider when researching the different types of stocks is the industry in which they operate.
Sectors are broad classifications of businesses based on their major business activities. Investors can gain diversification, identify growth possibilities, and limit risks by categorising stocks by sectors.
Here’s a quick overview of the various landscape:
Technology
Software, hardware, IT services, and electronics-focused businesses. The technology sector is renowned for its rapid growth and innovative expertise. The most obvious examples are Microsoft, Google, Lenovo, Samsung, and more.
Healthcare
Pharmaceuticals, biotechnology, medical equipment, and healthcare services comprise this industry. For instance, I’m sure you must be conversant with the vaccine manufacturer brands AstraZeneca and Pfizer. Yes, they fall under this sector.
Financials
All the banks, insurance providers, and investment firms belong to this sector.
Consumer Discretionary
Companies in this sector usually offer non-essential products and services such as fashion, clothing and entertainment, including film studios, record labels, etc.
Consumer Staples
Conversely, this sector focuses on fundamental products such as food, beverages, and home items. Companies in this sector could be grocery brands, farm and husbandry corporations
Energy
This category contains oil, gas, and alternative energy companies. As mentioned, hydrogen stocks could fall under this sector, too.
Industrials
This industry encompasses manufacturing, construction, and machinery companies. Companies such as Boeing, Caterpillar, 3M, etc, will be under this category.
Utility
This sector includes all the electricity or water providers. While it is debatable, gas providers hitherto still fall under this category.
Real Estate
This industry consists of companies like Simon Property Group and Equity Residential that concentrate on property development, management, and REITs.
Materials
This industry includes companies discovering, developing, and processing raw materials ranging from metals to chemicals. Dow, Newmont Corporation, and Ecolab are a few examples.
Telecommunication
This industry comprises companies like AT&T, Verizon, and T-Mobile that provide communication services.
Grasp and categorising the types of stocks based on sectors allows investors to grasp market patterns better, identify sector-specific risks, and locate opportunities in a more educated manner.
It provides a structured approach to portfolio diversification and strategy.
Conclusion
In the huge world of investments, understanding the various types of stocks is critical for sound decision-making. Each provides a unique risk-reward mix, from the towering titans of large-cap stocks to the burgeoning possibilities of small-cap stocks.
Further segmentation by industry sectors, such as technology, healthcare, and utilities, reveals the market’s broad diversity. Dividend vs non-dividend stocks, growth vs value, and ESG equities such as hydrogen stocks all demonstrate the market’s dynamic.
In the intricate world of investments, understanding these categories is similar to having a map. For individuals starting their financial journey, understanding these types of stocks not only lights the way but also increases the likelihood of profitable returns.
Dive deep, investigate, and let the complex world of stocks shape your financial story.
