If you want to start trading on the stock market you will need to know what types of stocks are available and understand the differences between them. For those looking for a simple overview to get you started, this article will take you through the two main types of stocks you need to know about and the common sub categories within them.
There are two main types of stocks, common stock and preferred stock. Both are sold by companies looking for cash investment and are traded among investors on the open market looking to make a profit.
Stock owners have partial ownership in the company that the stock represents and their total return includes any income received from the investment plus any change in its value.
What Are Common Stocks
As the name suggests common stocks are the most common type of stock issued by companies. Common stocks give owners voting rights proportional to the number of shares owned and have the potential for higher long term returns as they entitle shareholders to a share in the company’s profits. Meaning stock owners share the company’s success or lack of it.
As there are no price ceilings, it’s possible for shares to multiply in value several times over - but know they can always lose value too. The downside to common stocks is that dividends are not always available and if they are, they are not guaranteed and are generally lower than preferred stocks but common stocks are a good option for investors looking for long term investment growth.
What Are Preferred Stocks
Preferred stocks are generally considered less volatile than common stock but this means there is also less potential for profit. Preferred stocks don’t come with voting rights and generally have lower long-term growth potential than common stocks. Dividends are typically higher, fixed, guaranteed and paid out before the dividends on common stock - important in the case of bankruptcy or liquidation.
For those investing for income via dividends, preferred stock can be an attractive option but note that if company profits rise, preferred dividends are fixed. Preferred stock is good for investors looking for income over long term growth but you should note that companies can purchase preferred shares back from shareholders at any time for any reason.
Classes of Stock
It’s common for companies to divide their stock into different classes in order to differentiate between shareholder voting rights. For example, if you own Class A of a certain stock, you might get more voting rights per share than owners of Class B of the same stock. Investors can tell the difference with markers in the stock name, for example: StocknameA versus StocknameB. When companies have more than one class of stock, they typically have one that is publicly traded and one that is reserved for company founders and management which come with restrictions on selling them.
What is a stock?
A stock is an investment into a public company. Companies can sell shares of stock to the public as either common stock or preferred stock and investors that purchase stocks from companies own a small piece of that company called a share and are therefore shareholders. They will usually purchase stocks in companies that they think will go up in value, so that they can sell their stock for a profit.
What Type Of Stock Should I Invest In?
The type of stock that you invest in should be entirely dependent on your trading style, how much you have to invest, your attitude to risk and how much time you can dedicate to trading. To take advice from one of the most successful traders in the world; “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
Categories of Stock
Stocks are generally grouped into categories based on company size, industry or sector, how they react to the strength of the economy as a whole and their potential for growth and stock will generally fall into multiple categories.
- Company Size - Also referred to as large-cap, mid-cap and small-cap, short for marketing capitalisation and is a measure of the dollar value of a company. This value figure is worked out by multiplying the amount of outstanding shares by the current market price and generally fall into the following brackets: $10 billion or more, $2 - $10 billion and $300 million - $2 billion respectively.
- Industry & Sector Stocks - examples include utilities, financial companies, technology sector. It’s important to have an understanding of what industry your stocks are in as those in the same industry can often react in the same way to market or economic events so it’s important to invest in stocks from a variety of sectors to spread your risk.
- Growth & Value stocks - These are stocks that are either growing quickly (growth stocks) or are deemed to be underpriced by investors with the assumption they will increase in price eventually. (value stocks).
- Defense & cyclical Stocks - How stocks react to the strengths and weaknesses in the general economy. Defence stocks generally industries that people always need such as groceries, medicines and utilities whereas cyclical stocks are more sensitive to economic fluctuations like luxury goods and travel.
How Can I Learn More About Stock?
With so many options to choose from when it comes to buying stocks, it’s likely you won’t know where you want to trade until you get into it so you may find it helpful to see how others do it first.
Trade room plus is a professional live trading and trading education provider. If you want to find out more about types of stocks and how best to use them in a real trading environment, we can show you how to trade Forex & Index markets on spread bet and CFD broker platforms.
Trade Room Plus trades live in front of our members and thousands of aspiring traders on YouTube every single day - It’s real trading, real money in real-time and is the best way to learn how to build your own trading strategy.
Although it is always the hope that stock will increase in value over time, remember that whatever type of stock you choose to invest in, companies can lose value or go out of business completely so you should only ever invest what you’re prepared to lose, spread your money around between different stocks to minimise your risk.
We hope this article has given you a simple introduction to the types of stocks there are available to trade with and if you’re ready to boost your financial future by learning to trade from the experienced traders at Trade Room Plus we offer 14 days FREE access to our Professional Live Trade Room or you can find out more from our Trading Education guides here.
We have been showing our customers how to trade Forex, Index and Crypto markets on spread bet and CFD broker platforms since 2013 and we offer a comprehensive but accessible way to learn how to trade forex, start day trading, understand when to enter and exit a trade and how to improve your profitability.