Introduction

Stocks are a crucial part of investing in public companies. However, in order to make informed decisions, investors and traders need to have a deep understanding of the different types of stocks that make up the stock market. Stock types play a significant role in helping investors choose specific stocks to trade and determine valuation methods. This article will provide a comprehensive overview of the importance of stock types, various types of stocks every trader should know, and additional resources for further reading on stocks and the global stock market.

wall street stock market

Why are stock types so important?

Stock Types as Fundamental Component

Stock types serve as an essential foundation for stock traders’ investment strategies. It is crucial for traders and investors to distinguish between different stock types to align them with their financial goals and risk appetite. Understanding stock types enables traders to select the most suitable stocks for their investment needs.

Things to keep in mind with stock types

Risk Appetite

Risk appetite plays a significant role in determining the appropriate stock type for traders. Traders with a higher risk appetite are likely to opt for more volatile stocks, while those with a lower risk appetite tend to prefer stocks with consistent performance.

Voting Rights

Common stock and preferred stock are the two main types of stocks. Common stock provides voting rights to shareholders, allowing them to participate in important company decisions. On the other hand, preferred stock generally does not grant shareholders voting rights. Traders need to consider this distinction when selecting stock types.

Different types of stocks every trader should know

Common Stock and Preferred Stock

Two major types of stocks are common stock and preferred stock. Although they have several differences, the primary distinction lies in voting rights. Common stock allows shareholders to vote on company matters, while preferred stock typically does not grant voting rights. Both types of stock represent ownership in a company, with the expectation of potential appreciation in value.

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Pros and Cons of Common Stock

  • Voting rights
  • Potential stock appreciation
  • Lower dividends when accessible
  • Last in line to receive disbursements after creditors, bondholders, and preferred stock holders
  • Stock price and dividends may experience greater unpredictability

Pros and Cons of Preferred Stock

  • Steady and predictable dividend payments
  • Potential stock appreciation
  • Higher dividends when accessible
  • Shareholders have a higher probability of recovering some of the initial investment in case of bankruptcy
  • Lower longer-term growth
  • Low trading volume, making it difficult to buy or sell shares
  • No voting rights

Stock Market Sectors

The stock market sectors are categorized according to the Global Industry Classification Standard (GICS). There are 11 broad stock market sectors that divide the equity space. Each sector focuses on specific industries and companies associated with them. The sectors include Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Healthcare, Financials, Information Technology, Telecommunication Services, Utilities, and Real Estate.

Cyclical and Non-cyclical Stocks

Cyclical Stocks

Cyclical stocks are influenced by current economic conditions. When the economy is favorable, these companies tend to perform well. Examples of cyclical stocks include automotive companies since people tend to spend more on automobiles during good economic conditions.

Non-cyclical Stocks

Non-cyclical stocks demonstrate contradictory reactions to economic conditions. These stocks tend to perform well during periods of adverse economic circumstances. Companies providing essential products or services that are necessary regardless of economic conditions fall under this category. Healthcare stocks are an example of non-cyclical stocks.

Company Size

Another way to categorize stocks is by their market capitalization or market cap. This refers to the total market value of a company’s outstanding shares of stock. Stocks are typically divided into three categories based on market cap: large-cap, mid-cap, and small-cap shares.

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Large-cap:

Large-cap stocks have a market cap of $10 billion or more. Companies like Amazon fall into this category.

Mid-cap:

Mid-cap stocks have a market cap between $2 billion and $10 billion. Yeti Holdings is an example of a mid-cap company.

Small-cap:

Small-cap stocks have a market cap between $300 million and $2 billion. Axos Financial is an example of a small-cap company.

Domestic and International Stock

Stocks can be categorized as domestic or international based on the location of a company’s headquarters. However, this categorization might not always reflect a company’s actual business dealings, as many companies have a significant international presence. Therefore, solely relying on the company’s headquarters location for categorization may not provide a comprehensive view of the company’s metrics.

Growth and Value Stocks

Growth Stocks

Growth stocks are known for their potential to outperform the overall stock market over time. These stocks are typically associated with companies that are expected to experience substantial growth in the future.

Value Stocks

Value stocks are considered undervalued, meaning they are trading below their perceived fair price. Investors believe these stocks have the potential to provide positive returns in the future. Value stocks are often sought after by those using a value-oriented investment strategy.

Types of stocks FAQ section

Are types of stocks the same for global stock markets?

Stock markets worldwide generally adhere to the same designations mentioned in this article. The standardized framework facilitates analysis and comparison across stock types and markets. Without such standardization, the complexity of stock analysis would become challenging.

Conclusion

Understanding the various types of stocks outlined in this article is crucial for traders seeking to organize their stock trading strategies effectively. The differentiation of stocks into specific categories helps reduce the vastness of the stock market, enabling traders to focus on other important aspects of stock trading. By gaining a firm grasp of stock types, traders can improve their decision-making and ultimately achieve their investment goals.

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Further reading on stocks and the global stock market

For additional information and resources on stocks and the global stock market, readers can explore the following references:

– “Understanding the Stock Market” by DailyFX

– “Stock Sectors: A Closer Look” by DailyFX

– “Cyclical Stocks and Their Role in the Market” by DailyFX

– “A Guide to Market Capitalization” by DailyFX

– “Growth vs. Value Stocks: What’s the Difference?” by DailyFX

– “Foundational Trader’s Guide to Stock Valuation” by DailyFX