Types of stocks: different classes of stocks

Investors look for different types of stocks and bonds that satisfy their objectives from the many classes of stocks in the stock market. Stocks are a type of security that gives shareholders a share of ownership in a company. These types of securities are the basic building blocks of investing and are also called equities. We will look into the various stock types and then the classification of stocks based on different criteria.

When investing and buying stocks, investors have different objectives such as income, or growth as well as different risk profiles and investment horizons. Hence, in order to ease choosing, there are many categories of stocks based on their investment characteristics which will be further discussed in this article.

Because stocks are not all the same, there are many classes of stocks according to different aspects such as market capitalization, voting rights, performance during the market cycle, dividend payment, risk, fundamentals, etc in order to help investors choose the one that best suits their needs.

Before we dive into the different classes of stocks and types, let’s have an understanding of what stocks are and their benefits.

What are stocks?

Stocks are a type of security that gives shareholders a share of ownership in a company. The term stock is a general term that is used to describe the ownership certificates of any company. Owning stocks comes with so many benefits whether you buy them individually or collectively through mutual funds. Stocks appreciate in value and can also produce income from dividends.

There are different types of stocks in the stock market
There are different types of stocks in the stock market

For instance, the dividend income of stocks in the Standard & Poor’s 500 Stock Index from 1926 to 1997, averaged 4.6 % annually. Hence, 42% of the 11% of historical returns from stocks have been attributable to dividends. More so, one of the best ways to fight inflation is to own stocks because their returns have consistently exceeded the inflation rate. Since 1926, inflation has averaged about 3.1%. Following a rise in the inflation rate, many companies can pass on their higher costs to consumers, which causes their profitability and resulting stock prices to be less affected by inflation.

Also, owning stocks comes with a lot of tax benefits. For instance, until you sell, there are no taxes on the capital gains on stocks. The capital gains tax rates may be lower compared to the ordinary income tax rates and any capital gains on the stock investment can be passed to the heirs tax-free. Historically, one of the most important ways to financial success has been to invest in the stock market.

There are different classes of stocks in the stock market. However, the basic types of stocks based on voting rights are the common and preferred stocks. The holder of the common stocks has voting rights that can be exercised in corporate decisions whereas the holder of preferred stocks doesn’t. In addition to the common and preferred stocks, there are many types of stocks to trade and each stock type represents a different style of investment. The market sometimes favors one style of investment and sometimes favors another investment style. Hence, a well-diversified portfolio helps balance out such shifts in the market.

For developing strong stable investments, portfolio diversification is very important. A portfolio is a collection of a range of assets that an individual owns and invests in. It is necessary to know all the types of stock classifications as one plan for a diversified portfolio. Hence, knowing the features of all stock types when making plans to invest across companies of different market capitalizations, geographies, and investing styles will help contribute to a well-balanced portfolio.

Types of stocks to trade

  1. Common stock
  2. Preferred stock
  3. Large-cap stocks
  4. Mid-cap stocks
  5. Small-cap stocks
  6. Growth stocks
  7. Value stocks
  8. Defensive stocks/Non-cyclical stocks
  9. Cyclical stocks
  10. Domestic stock
  11. International stocks
  12. Blue-chip stocks
  13. Penny stocks
  14. IPO stocks
  15. ESG stocks
  16. Income (dividend stocks)
  17. Non-dividend stocks
  18. Speculative stocks
  19. Safe stocks
  20. Tech stocks
  21. Treasury stocks
  22. Retired stocks
  23. Undervalued stocks
  24. Overvalued stocks

In addition to the way companies may distinguish their shares into common and preferred shares, industry experts usually categorize stocks generally into classes. The common classes of stocks can be based on the size of the company, market capitalization, valuation, voting rights, performance during the market cycle, dividend payment, and potential for short and long-term growth.

Each class of stocks has its own features and is subject to certain external pressures that affect its performance at any given time. However, since stocks individually fit into one or more types of stocks, their behavior is subject to a variety of factors.

Here are all the different types of stocks to buy and trade, listed and discussed in various categories:

Types of stocks based on voting rights

  • Common stocks
  • Preferred stocks

The two types of stocks to trade based on voting rights are the common and preferred stocks. The holder of the common stocks has voting rights that can be exercised in corporate decisions whereas the holder of preferred stocks doesn’t. However, several companies offer both common and preferred stocks. For instance, Alphabet Inc.(Google’s parent company) lists Alphabet Inc. (GOOGL), as its Class A common stock, and Alphabet Inc. (GOOG), as its preferred Class C stock.

Common stocks

One of the basic types of stocks to buy is the common stock also referred to as ordinary shares. This type of stock is a popular kind of financial asset that investors buy in a publicly traded company. Common stocks are named so because they trade on the common or public market. Hence, companies often offer only common stock, because that is what shareholders most often look for to buy. They are more common than other types of shares or equity stakes.

This kind of stock represents partial ownership in a company. Holders of common stocks elect the board of directors and vote on corporate policies. Most people invest in common stock and the majority of the time, common stockholders are usually company founders and employees. More so, in a liquidation event, common stockholders only have rights to the company’s assets after preferred stock shareholders and other debt holders have been paid.

This type of stock represents partial ownership in a company and if the company gets dissolved, the holders get the right to receive a proportional share of the value of any remaining assets. A common stock gives the stockholders unlimited good potential. However, if the company fails without having any assets left over, the stockholders are at risk of losing everything.

Preferred stocks

Preferred stocks also referred to as preference shares suit investors that are looking for reliable passive income. The holders of these stocks are entitled to regular dividend payments before dividends are issued to common shareholders. Unlike common stocks, this stock type doesn’t carry voting rights. However, in an event of bankruptcy or the company dissolving, preferred shareholders get repaid first.

This stock works differently, giving shareholders a preference over common shareholders to get back a certain amount of money if the company dissolves. Preferred stocks compared to regular common stocks are closely more like fixed-income bond investments. There are different types of preferred stocks based on some peculiar characteristics. These preferred stock types include:

  1. Cumulative preference shares.
  2. Noncumulative preferred stock.
  3. Preference preferred stock.
  4. Prior preference shares.
  5. Convertible preference shares.
  6. Perpetual preferred stock.
  7. Exchangeable preference shares.
  8. Putable preferred stock.
  9. Participating preference shares.
  10. Monthly income preferred stock (MIPS)

Types of stocks based on market capitalization

  • Large-cap stocks
  • Mid-cap stocks
  • Small-cap stocks

Apart from the different types of trading stocks public companies issue, stocks can be grouped based on market capitalization (market cap). Market capitalization is the measure of value gotten from multiplying the company’s current stock price with the total number of outstanding shares. The outstanding shares are the shares of the company that are currently held by all its shareholders.

i.e Market Capitalization = Stock Price × Number of Stocks Outstanding

Based on the market cap, which is the total worth of all the shares in the company, stocks can be distinguished into 3 types of stocks such as large-cap, mid-cap, and small-cap stocks. Companies that have stocks with the biggest market capitalizations are referred to as large-cap stocks, with mid-cap and small-cap stocks representing successively smaller companies.

Depending on inflation, a large-cap company category are for stocks with a market cap exceeding $10 billion, whereas a mid-cap company has stocks with a market cap of $2 – $10 billion. Then, small-cap companies are valued at a market cap of less than $2 billion. The majority of these kinds of companies can be found by looking at the components of the various indexes, such as the Russell Indexes. Nevertheless, a company being grouped in the same category as a large-, mid-, or small-cap company doesn’t mean they will perform in similar ways in the future.

Large-cap stocks

Large-cap stocks are also types of stocks to buy in the stock market. Companies that have stocks with the biggest market capitalizations are referred to as large-cap stocks. These stock types have the best price stability with lesser risk. Generally, large-cap stocks are considered to be investments that are safe and more conservative.

Furthermore, investors can earn capital gains by holding these stocks for a long time. They can also buy these stocks at the end of a business cycle and as the economy reaches full speed, they can sell the stocks to earn capital gains. These stocks consist of stock types like income, blue-chip, cyclical, and defensive stocks.

Mid-cap stocks

The market cap of mid-cap stocks ranges from the top of the small-cap market to the bottom of the large-cap market. Mid-cap stocks have the ability to grow in the future but tend to be risker. These stock types are stocks of companies that have profit growth and stability with low levels of debt. However, the mid-cap companies are smaller in size than the large-cap companies. A typical type of mid-cap stock is the baby blue-chip stock.

Small-cap stocks

One of the types of stocks to invest in is the small-cap stock. These are stocks of small companies with the greatest growth potential. The majority of these stocks are speculative or growth stocks. Also, the majority of tech stocks are categorized in this group of stocks because many tech companies are startups to develop a new product or service and specialize in a narrow niche of the market.

Mid-cap and small caps stocks have the ability to grow in the future but tend to be risker. At the beginning of an economic expansion, small-cap stocks tend to do better compared to other stocks of larger companies that sell bonds directly to the market. However, the growth of these stocks can be restricted by the availability of credit. This is because these stocks depend more on bank financing.

As seen in the Russell microcap index, the small-cap stocks are sometimes differentiated from the even smaller micro-cap stocks. These micro-cap stocks consist only of stocks listed on major exchanges. Hence, the pink sheet stocks or OTC bulletin board securities are not included as they do not meet the requirements to be listed on a major exchange.

Classes of stocks based on performance during the market cycle

  • Defensive stocks/Noncyclical stocks
  • Cyclical stocks

One of the stock classes is to group stocks based on their performance during the market cycle into defensive and cyclical stocks. The difference between these stocks is how their profits and stock prices respond to the relative weakness or strength of the economy as a whole.

Defensive stocks (Non-cyclical stocks)

One of the types of shares to trade in the stock market is defensive stocks which are also known as secular or noncyclical stocks. These are stocks of firms that offer products and services to people regardless of the state of well-being of the economy. This means that, in stock market environments and in most economic conditions, defensive stocks would render consistent returns.

Some businesses benefit when consumers and other businesses cut down on their expenses. They benefit either by offering a way for consumers to cut costs or by selling at the lowest prices. For example, during the great recession of late 2008 and early 2009, people were doing their best to save more. During this period, most retailers were losing significantly while Wal-Mart was thriving. Walmart was one of the few that were thriving because it is recognized for selling at lower prices compared to other retailers.

Non-cyclical stocks operate in recession-proof industries such as food companies, consumer staples, drug manufacturers, and utilities. Take medical prescriptions for instance, regardless of the hard times, most people will continue and keep up with their medical prescriptions. The same is applicable to using electricity and buying groceries. The continuous demand for such commodities can keep some industries strong even when the economic cycle is weak.

Hence, defensive stocks are capable of generating consistent returns even in periods of economic weakness, so, they are less likely to face bankruptcy. They are stocks of companies that are resistant to economic cycles and make a profit regardless of the market cycle. These kinds of stocks don’t have big swings in demand because no matter how good or bad the economy is, there is still demand for the goods or services rendered by these companies. This is why defensive stocks tend to perform better during market downturns as compared to cyclical stocks that usually outperform during strong bull markets.

Therefore, in declining markets or economic slowdowns, defensive stocks are stable and relatively safe and usually outperform cyclical stocks because demand for core products and services remains relatively consistent. The Vanguard Consumer Staples ETF (VDC) enlists stocks from the Coca-Cola Company (KO), the personal care giant Procter & Gamble Company (PG), and the beverage makers PepsiCo, Inc. (PEP) as large-cap defensive stocks.

During a recession, the value of these stocks would decline less because the demand for their products or services is constant in any economic climate. This is why many investors include noncyclical stocks in their portfolios as an advantage against the sharp losses experienced in other stocks. These stocks may help protect a portfolio from steep losses during a sell-off or bear market.

Furthermore, non-cyclical stocks may also be income, value, or blue-chip stocks. In the core holdings of the Invesco Defensive Equity ETF (DEF), the Telecommunications giant AT&T Inc. (T), and healthcare multinational Cardinal Health, Inc. (CAH) are included among the defensive stocks.

Cyclical stocks

The economy of a nation tends to follow cycles of expansion and contraction, thus having periods of recession and prosperity. In contrast, to defensive stocks that thrive in both periods of recession and prosperity, some industries are very sensitive to economic up-and-downs. The stocks of such industries are known as cyclical stocks. As people try to cut down on unnecessary spending in times of economic hardship, these stocks may suffer decreased profits and tend to lose market value.

Cyclical stocks are stocks in companies whose earnings are affected sharply by fundamental changes within a specific industry or by changes in the business cycle. The earnings of these companies rise and the prices of their stock rise rapidly when business conditions are good. But when business conditions are bad, the earnings of the company and its stock prices decline rapidly. This means that these stocks are affected directly by the economy’s performance. Therefore, they follow economic cycles of expansion, recession, peak, and recovery.

Cyclical stocks would consist of company shares in the travel, luxury goods, and manufacturing industries. This is because a downturn in the economy can affect customers’ ability to make purchases. Nevertheless, the prices of cyclical shares can rebound sharply when the economy gains strength. This is because during such an economy, people have more money to spend, and their profits rise enough to create renewed investor interest. Therefore, when the economy is booming, a rush in demand can make these industries rebound sharply. Typical examples of cyclical stocks include Apple Inc. (AAPL), the aluminum company Alcoa, Brunswick Corporation (BC), and Nike, Inc. (NKE).

Investors, by buying the Vanguard Consumer Discretionary ETF (VCR) can add cyclical stocks to their portfolios. In times of economic strength, these stocks usually display more volatility and outperform other stocks. So, the ideal time to buy these types of shares is at the bottom of a business cycle to sell them at the top of a business.

Categories of stocks based on the potential for growth or value

  • Growth stocks
  • Value stocks

One of the categories of stock distinguishes stocks into growth and value stocks. These are two popular investment methods. Growth investors tend to search for companies that see their sales and profits rapidly whereas value investors tend to search for companies that have inexpensive shares in relation to their peers or their own past stock price.

Growth stocks

Growth stocks are stocks that are expected to grow at a faster rate in comparison to the broader market. These stocks seem to outperform during periods of economic expansions and low-interest rates. For example, in recent years, tech stocks have outperformed significantly. This is due to access to cheap funding and a robust economy.

Companies that reinvest a majority of their earnings into their businesses tend to have growth stocks. Compared to if the money were paid out as dividends, reinvesting can yield a higher return on stockholders’ equity and most importantly give a higher return to stockholders in form of capital gains. Because investors expect a high growth rate, these companies have a high price-to-earnings ratio.

Growth stocks, however, are risky because if a growth-oriented company doesn’t grow as expected, investors lower its future prospects, and the stock price drops. Hence, the price-to-earnings ratio declines. This means that the stock price will decline even if the earnings remain stable. The bear market is a kind of risk that is associated with growth stocks. In a declining market, growth stocks decline much more than income or blue-chip stocks. This is due to the fact that investors become pessimistic and sell their stocks, most especially those paying no dividends.

Since there can be strong competition in the industry, if competitors disrupt a growth stock’s business, it can fall from favor quickly. In fact, even a slowdown in growth can cause prices of stocks to lower sharply because the investors fear that the long-term growth potential is declining. However, despite the fact that growth stocks seem to have higher risk levels, their potential returns make them very attractive to investors.

The benefit associated with growth stocks is that capital gains are generally taxed at a lower rate than dividends, which are taxed as ordinary income. This is applicable especially for long-term capital gains where the stock has been kept for at least 1 year. Over the past ten years, growth stocks have outperformed value stocks by about 5.93%.

Additionally, growth stocks can be monitored by investors by following the SPDR Portfolio S&P 500 Growth ETF (SPYG). Successful growth stocks have companies that take advantage of the strong and rising demand among customers. These companies tap into customers’ demand in connection with longer-term trends around the society that support the purchase of their goods and services.

Value stocks

Value stocks are stocks that tend to trade at a lower price in relation to their fundamentals such as sales, earnings, or dividends. These stocks trade at a lower price than what the performance of the company portrays. And since the stock price may not match the company’s performance, value investors tend to capitalize on inefficiencies in the market.

Value stocks are appealing to value investors and can be contrasted with growth stocks. These stocks have more attractive valuations than the broader market with features such as high dividend yield, low price-to-book ratio (P/B ratio), and a low price-to-earnings ratio (P/E ratio). These stocks tend to outperform during times of economic recovery because they usually generate reliable streams of income.

Compared to growth stocks, value stocks are seen as a more conservative investment. They’re usually stocks of mature, well-known companies that have already grown into industry leaders. Hence, the companies are left with no room for further expansion such as financial, healthcare and energy firms. The companies have reliable business models that have stood the test of time. Therefore, they tend to be a good choice for investors seeking more price stability as they still get some of the benefits of exposure to stocks. Investors can add the SPDR Portfolio S&P 500 Value ETF (SPYV) to their watchlist in order to track value stocks.

Classes of stocks based on company size

  • Blue-chip stocks
  • Penny stocks

One of the stock classes is grouped based on company size and prestige. In this class of stock, stocks are grouped into blue-chip and penny stocks.

Blue-chip stocks

There are categories of stocks that make judgments based on perceived quality. In the business world, blue-chip stocks tend to be the cream of the crop. Hence, featuring companies that are industry leaders and have built a strong reputation. Blue-chip stocks are shares in the largest and most prestigious companies that are consistently profitable. They are well-established companies that have a large market cap. These stocks are known for paying dividends during bad and good times. They have a long history of generating dependable earnings and leading within their sector or industry.

Conservative investors may topweight their portfolios with this type of stock, especially in times of uncertainty. Blue-chip stocks usually offer investors, a stable predictable income with a steady to slow growth in value. Oftentimes, these stocks cost more than the stocks in smaller (or lesser-known) companies. They may not provide the absolute highest returns but their stability attracts investors that have a low tolerance for risk.

Typical examples of blue-chip stocks would include the energy bellwether Exxon Mobil Corporation (XOM), computing giant Microsoft Corporation (MSFT), technology corporation IBM (International Business Machines Corporation), the fast-food leader McDonald’s Corporation (MCD), and the pharmaceutical corporation Pfizer.

Due to the large size of these companies, the potential for growth is less, and therefore most of the return of the stocks is in form of dividends. Nevertheless, if these stocks are bought in a bear market, capital gains can be earned. A bear market is when the prices of stocks are depressed overall or held for a long time.

For example, Microsoft was trading below $20 per share during the great recession of November/December 2008 and the early part of 2009. Then, by mid-February 2020, the stock peaked at $185 per share. Meanwhile, before the recession, Microsoft was trading at around $30 per share for a very long period of time.

Penny stocks

Penny stocks are quite the opposite of bluechip stocks. They are low-quality companies with stock prices that are extremely cheap, usually trading at $5 or less per share. These stocks became well known in popular culture after the release of The Wolf of Wall Street (a movie about a former stockbroker who operated a penny stock scam).

The shares are inexpensive because the companies’ prospects are dicey. The majority of these companies may never be profitable or may even go out of business. Hence, penny stocks are prone to schemes that can drain one’s entire investment. However, despite the extreme risk associated with penny stocks, some investors still find them attractive because of the potential for their value to increase dramatically.

Many penny stocks trade through the OTCQB which is a middle-tier over-the-counter OTC market for U.S stocks. The OTCQB is operated by the OTC markets group. However, some penny stocks still trade on major exchanges. Investors when placing buys and sell orders in penny stocks should consider using limit orders because they usually have a large spread between the bid and ask price.

Types of stocks based on dividend payment

  • Income/dividend stocks
  • Non-dividend stocks

Income stocks (dividend stocks)

Many stocks pay dividends to their shareholders on a regular basis. These dividend payments provide valuable income for investors and this is what makes the stocks highly sought after. Technically, a company even paying $0.01 per share qualifies as a dividend stock.

Dividend stocks which are also known as income stocks are stocks that provide regular income to shareholders. This income is paid out in form of dividends which are provided by distributing the profit made by the company or its excess cash. Income stocks can also be referred to as company stocks that have more mature business models and have relatively fewer long-term opportunities for growth.

This type of stock generates most of its returns as dividends. As the company’s earnings grow, the dividend may continue to grow year after year. This is, however, not the case for the dividends of preferred stock or the interest payments of bonds. The companies issuing out income stocks have a high dividend payout ratio. This is because there are fewer opportunities to invest the money in the company that would yield a higher return on stockholders’ equity. Hence, the majority of these companies are large companies and are also considered blue-chip companies, e.g General Electric Company (GE).

These stocks have lower volatility and less capital appreciation than growth stocks. Hence, they are a favorite among risk-averse investors seeking a regular stream of income and those in or close to retirement. Income stocks tend to be ideal for conservative investors who need to receive money from their investment portfolios immediately. Investors seeking income stocks can access them through the Amplify High Income ETF (YYY).

Non-dividend stocks

Stocks don’t have to necessarily pay dividends. Such stocks that don’t pay dividends are referred to as non-dividend stocks. These stocks can still be strong investments if their stock prices increase over time. In fact, some of the biggest companies around the globe don’t pay dividends. However, the trend nowadays has been channeled more to stocks that make dividend payouts to their stockholders.

The people investing in non-dividend stocks do so because of the potential growth of the stock. This is because companies that do not make dividend payout reinvest their profit back into the company which usually causes a stock to grow. Investors can sell their stocks later on for capital gain which can make them earn more income compared to what they would have gotten from dividend payouts.

For example, the company Amazon is usually criticized for not paying dividends to its stockholders. However, let’s look at the growth of their stock price from 2000 to 2020 (20 years). In October 2000 the stock price of Amazon was around $30. Then, as of October 27th, 2020, the stock price was valued at roughly $3,286.

Now, this means that if a shareholder in 2000 owned $30,000 worth of Amazon stock, in 2020, the stocks would be worth roughly $3,286,000. Hypothetically speaking, if this shareholder sold the stock at that time, he would have made $3,266,000 off of Amazon’s stock over 20 years, despite Amazon not paying a single dividend.

Stock types based on location

  • Domestic stocks
  • International stocks

There are two types of stocks based on where they are located, which include domestic and international stocks. In order to distinguish domestic stocks from international stocks, most investors factor in the location of the company’s official headquarters. Notwithstanding, it is good to understand that a stock’s geographical category doesn’t necessarily correspond to where the company gets its sale. For example, Philip Morris International (NYSE: PM) has its headquarters in the U.S but sells its tobacco and other products exclusively outside the U.S.

Domestic stocks can be referred to as stocks of American companies that are traded on various stock exchanges whereas, international or foreign stocks are the different stocks of companies outside the United States. However, if these international stocks trade on U.S. exchanges, it is done through an American Depository Receipt (ADR). Furthermore, it can be difficult to ascertain whether a company is truly domestic or international from business operations and financial metrics. It is usually hard to tell especially among large multinational corporations.

Classes of stocks based on valuation

  • Undervalued stocks
  • Overvalued stocks

Stocks can be categorized based on evaluating the stock fundamentals. These fundamentals are crucial metrics for a company, such as cash flow and return on assets (ROA). Analysts usually analyze a stock by looking at its fundamentals. This fundamental analysis is performed by looking at any data which is expected to impact the stock price or perceived stock value.

Investors in value investing believe that a stock price must be equal to the intrinsic value of the company’s stock. Hence, they compare the price of the stock with metrics like per-share earnings, profits, etc to get an intrinsic value per share. This will help ascertain if a stock is undervalued or overvalued.

Generally, there are two types of stock valuation metrics that investors use such as relative value ratios and absolute value models. They use the relative valuation ratios to compare stocks to their sector or to the overall market. These ratios include the PE ratio, PEG ratio, EV/EBITDA, Price to Sales, Price to Free Cash Flow, (Equity, NAV, and Book Value per share), and price to book. Some of these ratios compare the stock price or enterprise value to items from the income statement, while others compare the stock price to balance sheet items.

Undervalued stocks

Undervalued stocks are those stocks that trade below their market value. These types of shares are known to be profitable and have the potential for long-term growth. However, they are undervalued because the stock market hasn’t recognized their potential yet. Hence, they trade below their worth.

Stock is sometimes undervalued because it is pulled down by its sector or the overall market. Meanwhile, the companies of such stocks often have good net free cash flow, strong balance sheets, and a strong future outlook. For example, Qualcomm which has been pulled down with the overall tech sector is trading at a greater discount in comparison to its peers.

In as much as investors look out for undervalued stocks, there are downsides to it. There may be reasons why a stock is actually trading below its value which may not be willingly kept open to the public. For instance, the company may be experiencing serious issues such as issues with financial management or unexpected changes in the company.

Overvalued stocks

The most common valuation metric for publicly traded companies is the price-to-earnings ratio. This metric analyzes the stock price of a company to its earnings.

Overvalued stocks are stocks that are traded at a price that is not justified by their price-to-earnings ratio or earnings forecast (profit projections). As a result of that, analysts and other economic experts expect the stock price to drop eventually.

This means that an overvalued company trades at an unjustifiably rich level as compared to its peers. For example, if a stock price trades for 50 times its earnings, it is likely to be overvalued compared to a stock that is trading for 10 times its earnings.

Other stock types

  • IPO Stocks
  • ESG Stocks
  • Speculative Stocks
  • Safe stocks
  • Tech stocks
  • Treasury stocks
  • Retired stocks

IPO Stocks

When a company goes public, it can issue stock through an initial public offering known as IPO. This means that IPO stocks are stocks of companies that have recently gone public through an IPO. Market commentators also refer to recently listed stocks as IPO stocks.

IPO stocks get allocated at a discount before the stock of the company list on the stock exchange. These stocks may also have a vesting schedule that prevents investors from selling all of their shares when the stock starts trading. Generally, IPO stocks retain their status for at least a year and a maximum of two to four years after it becomes public.

IPOs usually create a lot of excitement among investors looking to partake in a promising business concept. Investors looking for upcoming IPOs can monitor them through the Nasdaq website. These stocks, however, can be volatile, especially when there’s disagreement within the investment community about their prospects for growth and profit.

ESG Stocks

Environmental, social, and corporate governance (ESG) stocks focus on environmental protection, social justice, and ethical management practices. For example, an ESG stock may be a company that produces equipment for renewable energy infrastructure or a company that agrees to cut down its carbon emissions at a higher rate compared to national and industry targets in order to check air pollution.

ESG investing is an investment style that puts emphasis on environmental, social, and governance concerns. This investment philosophy has principles that consider other collateral impacts on the customers, environment, employees, and shareholder rights rather than focusing exclusively on whether the company makes a profit and is growing its revenue.

ESG stocks have become more popular in recent years with the millennial generation that is more likely to invest in things that they believe in and support. It has become one of the types of stocks to invest in to promote environmental protection, social justice, and ethical management practices. Investors looking out for ESG stocks can access them by adding the Vanguard ESG U.S Stock ETF (ESGV) to their portfolio.

Investors looking out for ESG stocks usually use SRI (socially responsible investing) to screen out companies’ stocks that don’t meet up to their most essential values. Hence, ESG investing actively encourages investment in the companies that do things the best. It is evident that a clear commitment to ESG principles can improve investment returns.

Speculative Stocks

Speculative stocks are stocks of companies with little or no earnings, or rather widely varying earnings. Despite the little-to-no earnings, these companies have great potential for appreciation due to either of these reasons:

  • These companies have the potential of becoming a monopoly
  • They could be tapping into a new market
  • The company could be operating under a new management
  • They are developing a potentially very lucrative product that could cause the stock price to increase if successful.

Many Internet companies were considered speculative investments. The majority of these stocks during the stock market bubble of the latter half of the 1990s had ridiculous market capitalizations. Many of them had virtually no earnings, and many have since then, failed. However, a few of these speculative investments then such as Amazon have grown to become major corporations. Other tech companies, like Facebook, have become de facto monopolies. Hence, earning very high-profit margins, which is reflected in their stock prices today.

Many speculative stocks are traded frequently by investors who are gambling and hoping to make a profit by timing the market. This is because speculative stocks range wildly in price as their perceived prospects constantly change.

Safe stocks

Safe stocks are also known as low-volatility stocks. These are stocks whose prices make relatively small movements up and down compared with the overall stock market. They usually operate in industries that are not really sensitive to changing economic conditions. Safe stocks often pay dividends that can offset falling share prices during tough times.

Tech stocks

Tech stocks as the name implies are the stocks of technology companies. These are companies that manufacture computer equipment, communication devices, and other technological devices. These stocks are listed on NASDAQ. Tech stocks can be considered growth stocks or speculative stocks. Some of these stocks such as Intel or Microsoft are even considered blue-chip stocks.

Notwithstanding, tech companies are exposed to significant risk. This is because research and development efforts are hard to evaluate, and since technology is evolving every day, the fortunes of many companies can quickly change. The fortune of these tech companies changes quickly especially when current products are displaced by new products.

Treasury stocks

Treasury stocks are previous outstanding stocks that are bought back from stockholders by the issuing company. They are also called reacquired stock or repurchased shares; repurchasing shares causes the total number of outstanding shares on the open market to decrease. These stocks are issued but are no longer outstanding. Hence, they are not included in the distribution of dividends or the calculation of earnings per share (EPS).

These stocks are repurchased from the open market and reduce shareholders’ equity by the amount paid for the stock. After being repurchased from stockholders, they can be retired or held for resale in the open market. Furthermore, once the stocks are retired or canceled, they are no longer listed as treasury stock on the financial statements of the company. The non-retired treasury stocks, on the other hand, are resold for capital raising, stock dividends, or employee compensation. There are so many reasons why companies buy treasury stocks.

Retired stocks

Retired stocks are permanently canceled stocks that cannot be reissued later after being bought back from stockholders by the issuing company. In order to retire stock, a company must buy back the stocks first and then cancel them. These stocks cannot be reissued on the market, and are considered to have no financial value. They are null and void of ownership in the company and are no longer listed as treasury stock on the financial statements of the company.

FAQs on types of stocks

What type of stock does a large company issue?

Large companies usually issue different stocks that fall into the category of blue-chip stocks, large-cap stocks, and income stocks.

What are the four types of stocks?

There are more than four types of stocks. The common stock types include common stocks, preferred stocks, large-cap stocks, mid-cap stocks, small-cap stocks, growth stocks, value stocks, defensive stocks, cyclical stocks, blue-chip stocks, penny stocks, IPO stocks, income (dividend stocks), etc.

What are the different types of stocks?

There are different types of stocks in the stock market. However, the basic types of stocks based on voting rights are the common and preferred stocks. Apart from these stocks, there are many other types such as large-cap, mid-cap, and small-cap stocks. Others may include growth stocks, value stocks, defensive stocks, retired stocks, etc. Each stock type represents a different style of investment. The market sometimes favors one style of investment and sometimes favors another investment style.

What are the two types of stocks?

There are different types of stocks in the stock market. However, the two types of shares based on voting rights are the common and preferred stocks.

A video explaining the different types of stocks
Last Updated on July 31, 2022 by Nansel Nanzip Bongdap
Obotu Agape Oguche