When most people think of stocks, they usually think of publicly traded stocks. However, it is important for investors to be aware of the different types of stocks available, understand their unique characteristics, and be able to determine when they may be a suitable investment. Below we outline the different share classes, with the aim of eliminating confusion of the different classes of shares available to investors.
Key points to remember
- Understanding the different classes of stocks can help investors make more informed investment decisions and reduce portfolio risk.
- Preferred shares give holders regular dividend payments before dividends are paid to common stockholders, but do not carry voting rights.
- Income stocks provide regular income by distributing a company’s earnings, or excess cash, through dividends above the market average.
- Blue chip stocks are stocks of well-established companies with a large market capitalization.
- ESG actions emphasize environmental protection, social justice and ethical management practices.
Common and preferred shares
Common stock, sometimes referred to as common stock, represents partial ownership of a company. This class of shares entitles investors to the profits generated, usually paid out in the form of dividends. Common stockholders elect a corporation’s board of directors and vote on corporate policies. Holders of this class of shares have rights to a company’s assets in the event of liquidation, but only after preferred shareholders and other debt holders have been paid. Company founders and employees usually receive common stock.
On the other hand, preferred stock, or preferred stock, entitles its holder to regular dividend payments before the dividends are distributed to common stockholders. As mentioned above, preferred shareholders are also reimbursed first if the company dissolves or goes bankrupt. Preferred shares do not carry voting rights and are suitable for investors looking for reliable passive income.
Many companies offer both common stock and preferred stock. For example, Alphabet Inc., Google’s parent company, lists Alphabet Inc. (GOOGL), its class A common stock, and Alphabet Inc. (GOOG), its preferred class C stock.
Growth stocks vs value stocks
As the name suggests, growth stocks refer to stocks that are expected to grow at a faster rate relative to the market as a whole. Generally, growth stocks tend to outperform during times of economic expansion and when interest rates are low. For example, tech stocks have significantly outperformed in recent years, fueled by a robust economy and access to cheap funding. Investors can monitor growth stocks by following the thematic exchange-traded fund (ETF), the SPDR Series Trust – SPDR Portfolio S&P 500 Growth ETF (SPYG).
Conversely, value stocks trade at a discount to what a company’s performance might otherwise indicate, typically having more attractive valuations than the broader market. Value stocks, such as financials, healthcare and energy names, tend to outperform during periods of economic recovery as they typically generate reliable income streams. Investors can follow value stocks by adding the SPDR Series Trust – SPDR Portfolio S&P 500 Value ETF (SPYV) to their watchlist.
Growth stocks have outperformed value stocks by 5.42% on an annualized basis over the past 10 years.
Income stocks are stocks that provide regular income by distributing a company’s profits, or excess cash, through dividends above the market average. Typically, these stocks – think utilities – have lower volatility and capital appreciation than growth stocks, making them suitable for risk-averse investors looking for a steady stream of income. Investors can access income stocks through the Amplify High Income (YYY) ETF.
Blue chip stocks
Blue chip stocks are well-established companies that have a large market capitalization. They have a long and successful track record of generating reliable revenue and leadership within their industry or sector. Conservative investors can overweight their portfolio with blue chip stocks, especially in times of uncertainty. Several examples of blue chip stocks include computer giant Microsoft Corporation (MSFT), fast food leader McDonald’s Corporation (MCD) and energy leader Exxon Mobil Corporation (XOM).
Cyclical and non-cyclical stocks
Cyclical stocks are directly affected by the performance of the economy and generally follow economic cycles of boom, peak, bust and recovery. They typically show more volatility and outperform other stocks during strong economic times when consumers have more discretionary income. iPhone maker Apple Inc. (AAPL) and sports equipment giant NIKE, Inc. (NKE) are examples of cyclical stocks. Investors can add cyclical stocks to their portfolios by purchasing Vanguard Consumer Discretionary Index Fund ETF (VCR) shares.
On the other hand, non-cyclical stocks operate in “recession-proof” industries that tend to perform reasonably well regardless of the economy. Non-cyclical stocks generally outperform cyclical stocks during economic downturns or slowdowns because demand for basic products and services remains relatively constant. The Vanguard Consumer Staples Index Fund ETF Shares (VDC) offers exposure to large-cap defensive stocks like personal care giant The Procter & Gamble Company (PG), as well as beverage makers PepsiCo, Inc. (PEP) and The Coca-Cola Company (KO).
Defensive stocks generally provide consistent returns in most economic and stock market conditions. These businesses typically sell essential products and services, such as consumer staples, healthcare, and utilities. Defensive stocks can help protect a portfolio from large losses during a sell-off or a bear market. A defensive stock can also be a value, income, non-cyclical or blue chip stock. Telecommunications giant AT&T Inc. (T) and multinational healthcare company Cardinal Health, Inc. (CAH) are several defensive stocks included in the top holdings of the Invesco Defensive Equity ETF (DEF).
Defensive stocks are less likely to fail due to their ability to generate consistent returns during periods of economic weakness.
When a company goes public, it issues shares through an initial public offering (IPO). IPO shares are usually assigned at a discount before the company’s stock listings on the stock exchange. It may also have a vesting schedule to prevent investors from selling all of their shares when the stock begins trading. Market commentators also use the term “IPO shares” when referring to recently listed stocks. Investors can monitor upcoming IPOs through the Nasdaq.com website.
A penny stock is a stock valued at less than $5 and is considered highly speculative. Although some penny stocks trade on major exchanges, many trade through the OTCQB, a mid-tier over-the-counter (OTC) market for US stocks operated by OTC Markets Group. Investors should consider using limit orders when placing buy and sell orders for penny stocks, as they often have a large spread between the bid price and the ask price.
Penny stocks rose to prominence in popular culture after the release of “The Wolf of Wall Street,” a film about a former stockbroker who ran a penny stock scam. Investors looking to bet on penny stocks should look to the iShares Micro-Cap (IWC) ETF.
Environmental, social and corporate governance (ESG) actions emphasize environmental protection, social justice and ethical management practices. For example, an ESG action could be a company that commits to reducing its carbon emissions at a rate above national and industry targets or a company that manufactures equipment for renewable energy infrastructure.
ESG stocks have grown in popularity with millennials in recent years, a socially conscious generation who are more likely to invest in things they believe in and support. Investors can access ESG stocks by adding the Vanguard World Fund – Vanguard ESG US Stock ETF (ESGV) to their portfolio.
What is the main difference between common stock and preferred stock?
Preferred shares give holders priority over a company’s income, but do not confer voting rights like common shares.
What type of investor are income stocks suitable for?
Income stocks are suitable for risk-averse investors seeking regular income through the payment of dividends.
What is the main characteristic of defensive actions?
Defensive stocks generally provide consistent returns in most economic and stock market conditions.
Where can I buy speculative penny stocks?
Investors can purchase speculative penny stocks through OTCQB, a mid-tier over-the-counter (OTC) market for US stocks operated by OTC Markets Group.
Understanding the key differences between share classes helps investors make more informed investment decisions and manage risk within their portfolios. In addition to buying different types of stocks directly, investors can gain profitable exposure to thematic types of stocks through ETFs.