What Are the Different Types of Stocks?

Quick Answer

It's a good idea to diversify your portfolio with different types of stocks, including common stocks, preferred stocks, international stocks and penny stocks.

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Investing in the stock market can be risky, especially if you don't diversify your portfolio. Depending on your investment strategy, it's a good idea to invest in a variety of stocks, as well as other assets such as bonds, mutual funds and exchange-traded funds.

As you construct your portfolio, the stocks you invest in will depend on your individual investment goals, familiarity with the stock market, risk tolerance and more. With that in mind, understanding the different types of stocks that are available can make it easier to determine where to invest your money. Here are 15 types of stocks and how they work.

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1. Common Stock

When you think about the stock market, you're generally thinking about common stock. A share of common stock represents a partial ownership in the company that issued it.

In addition to benefiting from potential stock price appreciation and dividends, common stockholders also get voting rights when it comes to electing the company's board of directors and choosing corporate policies.

2. Preferred Stock

Companies also issue preferred stock, which pays a regular dividend, even if the company's common stock doesn't. Additionally, if the company is behind on dividend payments or if it goes bankrupt or liquidates its assets, preferred stockholders get priority over common stockholders. If your priority is to earn income and minimize risk, consider preferred stocks.

That said, preferred stockholders don't get voting rights. While preferred stocks tend to be less risky, you may not get the same price appreciation as a common stockholder in the same company. Finally, preferred stocks aren't as widely traded on stock exchanges as common stocks.

3. Large-Cap Stocks

Large-cap stocks are stocks that have a market capitalization—the total value of the company's shares—of $10 billion to $200 billion. Stocks with a market cap higher than that are considered mega-cap stocks.

Large-cap stocks typically have a strong financial reputation and steady growth. They also usually pay dividends, making them less risky compared to medium- and small-cap stocks.

If you want to calculate a company's market cap, multiply the number of outstanding shares of common stock by the current stock price.

4. Mid-Cap Stocks

A mid-cap stock typically has a market cap ranging from $2 billion to $10 billion. These companies are often well established, but unlike most large-cap stocks, they may be experiencing high growth as they increase their market share or competitiveness in their respective industries.

While mid-cap stocks tend to be riskier than large-cap stocks—albeit with greater growth potential—they're not as risky as small-cap stocks.

5. Small-Cap Stocks

Small-cap stocks have a market capitalization of $300 million to $2 billion. Stocks with a market cap below that minimum threshold are often called micro-cap stocks.

Small-cap stocks are often young companies in emerging or niche industries. They often have more upside potential than mid- and large-cap stocks, but there's also a greater risk of loss, especially during a business or economic downturn. They tend to be more popular among investors with a high risk tolerance.

6. Blue-Chip Stocks

Blue-chip stocks get their name from the blue poker chip, the most valuable chip in the classic three-chip set. These companies are large and well established, generally the leaders in their respective industries.

There's no strict definition for what qualifies as a blue-chip stock. Some investors may consider a stock blue chip if it's included in a specific stock index, such as the Dow Jones Industrial Average, or they may base their definition on the company's dividend or market cap.

In general, though, these stocks are typically less risky than others, with a strong financial track record and regular dividends. Consider blue-chip stocks if you have a low risk tolerance or if you want to diversify a portfolio that also contains riskier stocks.

7. Growth Stocks

As their name suggests, growth stocks have prices that are appreciating faster than the market average. These companies typically don't pay dividends, opting instead to invest in further growth. However, investors may be able to benefit from better returns in the form of price appreciation.

That said, because growth stock companies are often putting a lot of resources into growth, they may be more susceptible to business or economic downturns, making them riskier than blue-chip stocks. Consider them if you have a somewhat high risk tolerance.

8. Income Stocks

While companies of all shapes and sizes pay dividends to their shareholders, income stocks tend to be larger companies that pay them regularly. As a result, they're typically less risky than growth stocks.

You may consider income stocks if you want to minimize your risk and receive consistent income from your investments.

9. Value Stocks

Value stocks have a low price relative to their earnings, typically because they've lost favor with investors for one reason or another. They can be growth or income stocks.

As you compare different stocks within an industry, stocks with a below-average price-to-earnings (PE) ratio are considered value stocks. You may consider investing in value stocks with the hopes of a short-term price rebound. Before you do, however, make sure you understand the reason for its low PE ratio.

10. International Stocks

International stocks represent shares of a company that operates outside of the U.S. That said, you may be able to buy international stocks on a U.S. stock exchange in the form of an American Depository Receipt (ADR).

International stocks can help diversify your portfolio because they're subject to different market forces compared to domestic stocks. At the same time, your return can also be impacted by geopolitical issues, foreign regulations and currency exchange rates, so it's important to do your research before investing.

11. IPO Stocks

An initial public offering (IPO) occurs when a company first sells shares of its stock to the public. While individual investors have historically had little to no access to IPO stocks, some online brokers are making it easier for individual investors to get in on them.

While IPOs can create significant short-term gains, that's not always the case, and going public doesn't necessarily mean that the company is a long-term winner. As such, they're best for investors with a high risk tolerance.

12. Penny Stocks

Penny stocks are companies that have very little or even no earnings. As their name suggests, they often sell for under $1, but some trade as high as $5. Because these stocks aren't usually sold on major stock exchanges, they lack the same transparency as traditional stocks and are highly speculative. In other words, avoid them unless you're an experienced investor with an extremely high risk tolerance.

13. Cyclical Stocks

Cyclical stocks tend to perform well when the economy is strong and poorly when the economy contracts. Companies that offer products and services that consumers spend less on during an economic downturn, such as airlines, retailers and restaurants, typically have cyclical stocks.

Cyclical stocks can be a great buy during the period when the economy is recovering from a recession, or they can be a good fit for long-term investors who don't mind short-term volatility.

14. Defensive Stocks

Unlike cyclical stocks, defensive stocks tend to be more resilient to downturns in the economy or stock market. This is primarily because they offer goods and services that consumers need, such as health care, utilities, groceries and pharmaceuticals. Consider investing in defensive stocks if you have a low risk tolerance or you anticipate a market downturn.

15. ESG Stocks

Short for environmental, social and government, ESG stocks are companies that focus on things like sustainability, social responsibility or environmental impact. Consider these stocks if you want your investment portfolio to align with your personal values.

The Bottom Line

As you decide how to invest your money, it's important to develop your investment strategy in a way that helps you work toward your investment goals but also provides some flexibility for your approach to change over time.

Once you have an idea of how you want to construct your portfolio, understanding how the different types of stocks work can make it easier to know which ones to buy. If you're unsure about how to construct your portfolio, consider consulting with a financial advisor.