A stock is an investment in a public company. When a company sells shares to the public, those shares are typically issued as one of two main types of shares: common shares or preferred shares. Here’s a breakdown.
If you are new to investing in stocks and want to buy some stocks, you probably want to invest in common stocks, which is exactly what the name suggests – the most common type of stock.
When you own common stock, you own a share of the company’s profits, as well as the right to vote. Common stock owners can also earn dividends, a payment that is made to stock owners on a regular basis, but those dividends are often variable and not guaranteed.
The other main type of stocks, preferred stocks, are often compared to bonds. It generally pays investors a fixed dividend. Preferred shareholders also receive preferential treatment: Dividends they are paid to preferred shareholders before ordinary shareholders, even in the event of bankruptcy or liquidation.
Preferred stock Prices are less volatile than common stock prices, which means stocks are less likely to lose value, but they are also less likely to gain value. In general, preferred stocks are best for investors who prioritize income over long-term growth.
Common Stock vs. Preferred Stock
Other stock categories
Within those broad categories of common and preferred shares, the different types of shares are divided in other ways. Here are some of the most common:
Size of the company: You may have heard the words large cap or mid-cap before; They refer to market capitalization, or the value of a company. Companies are generally divided into three groups by size: large cap (market value of $ 10 billion or more), mid-cap (market value between $ 2 billion and $ 10 billion), and small cap (market value between $ 300 million and $ 2 billion).
Industry: Companies are also divided by industry, often referred to as a sector. Stocks in the same industry, for example the technology or energy sectors, can move together in response to economic or market events. That’s why it’s a good rule of thumb to diversify by investing in stocks from all sectors. (Ask someone who had a portfolio of tech stocks during the dotcom crash.)
Location: Populations are often grouped by geographic location. You can diversify your investment portfolio by investing not only in companies that do business in the US, but also in internationally-based companies and in emerging markets, which are areas that are poised for expansion. (Here is more about how to invest in international stocks.)
Style: You may hear that stocks are described as growth or value. Growth stocks come from companies that are growing rapidly or ready to grow rapidly. Investors are often willing to pay more for these stocks because they expect higher returns.
Value stocks are essentially for sale – they are stocks that investors have deemed undervalued and undervalued. The assumption is that these stocks will increase in price, because they are currently flying under the radar or suffering a short-term event.
Types of share classes
Companies can also divide their shares into classes, in most cases to differentiate the voting rights of shareholders. For example, if you own Class A of a certain share, you can get more voting rights per share than Class B owners of the same share.
If a stock has been segmented into different classes, each class usually has its own ticker symbol. For example, 21st Century Fox shares are sold under FOXA (A shares) and FOX (B shares).
Choosing the right actions for you
An important consideration when invest in stocks It’s not necessarily the category of the stock, but whether you believe in the long-term growth potential of the company and whether the stock complements the other investments you own.
But if the idea of pooling individual stocks into a diversified portfolio seems daunting, and it certainly can be, you may want to consider stock index funds.
Index funds are one of the easiest ways to build a diversified portfolio. These funds allow you to buy many different types of stocks in a single transaction: they track a section of the market, such as large-cap stocks, following a benchmark index, such as the S&P 500. For more information on index funds, read our full explainer.
Disclosure: The author did not hold positions in the aforementioned securities at the original time of publication.