What Types of Stocks Are There? And Which Is Best?
- Stock is a security issued by a joint-stock company or an issuing company
- The stock just confirms that its owner has a share in the company, even if it is very small
- There are two major stock types that you will find: common and preferred
- There are 3 main kinds of stocks: dividend, penny, and blue-chip
2 Types Of Stocks You’ll Find
Many companies offer stock market investors common and preferred stocks in order to raise capital for their business. Both types of securities are popular objects for investing money, but it is common stocks that are the keystream in the formation of financial resources of joint-stock companies (JSC).
Company stocks are common and preferred. The differences are related to two main rights – to vote and receive dividends.
- Common – The most common type of stock. They always give the right to vote at shareholders’ meetings but do not guarantee dividends.
- Preferred – They have a predetermined dividend amount – for example, a percentage of the company’s profits. Their owners can vote only if they have not received dividends for the last year.
Both types of stocks are pretty popular among investors and traders. Below we will go through each of them comprehensively and find out the main characteristics.
Common stock is a fixed unit of the share capital of an enterprise. Stocks of public JSCs, which are listed on stock exchanges, are one of the most important types of securities. They act as an object for sale and purchase on stock exchanges and are traditionally the most demanded assets on the market.
Stocks are profitable in the form of dividends paid in proportional parts of the company’s net profit. In the long term, the yield on common stock is on average higher than the yield on other securities due to capital growth. Thus, it compensates for the higher investor risk. Common stocks are considered to be equity instruments of a lower status relative to other classes of equity securities.
Common stocks give the right to receive unfixed dividends by the holder if the relevant decision was made by the meeting of shareholders and in the overwhelming majority of cases by the supervisory board.
Dividend restrictions can be imposed by the existing legislation of the country. For example, in some countries it is prohibited to pay amounts to shareholders for those reporting periods for which the firm’s net profit was not recorded, or if there is a court decision on the prohibition, including by international arbitration court organizations.
Common stockholders usually have voting rights at the shareholders’ meeting. Common stocks are traded on the over-the-counter market and stock exchanges.
Market and par value of stocks are different concepts.
- The market price of a security is its rate on the stock exchange, that is, the fluctuating cost of buying and selling. The market price of the total number of shares issued by the company represents its capitalization.
- The par price is the value that is indicated on the stock itself. This figure denotes the part of the authorized capital of the company per share. Dividends are paid in proportion to this share.
Preferred stocks are equity securities that give the investor the right to receive specified payments in the form of dividends.
In addition to guaranteed dividends, the holder of such stocks has the right to claim part of the income from the sale of property and to compensate for losses in the event of the liquidation of the enterprise. The charter may prescribe the liquidation value – this is a fixed amount or part of the nominal value that is paid to the holders of the preferred stocks upon the liquidation of the joint-stock company.
However, there is a downside to guarantee payments: preferred stocks restrict the investor in making managerial decisions. The holder of the preferred stock cannot participate in the voting of shareholders but he has the right to take part in resolving issues related to the reorganization or liquidation of the company.
Voting with preferred stocks is provided to all holders in some other cases: for example, when making decisions on the placement of new shares, for making additions to the charter, etc.
The issue of preferred stocks allows raising additional funds without increasing the number of shareholders with voting rights and without incurring debt, as is the case with the issue of bonds.
3 Main Kinds Of Stocks
We have mentioned two main types of stocks that are common and preferred. However, we should also get acquainted with “kinds”. This is different from “type”. You can have a look at the 3 main kinds of stocks that are:
We will explore them thoroughly in our guide. Keep in mind that these stocks come with certain advantages and disadvantages and there is no “perfect” kind of stock to choose from.
Dividend stocks explained: You can get paid simply for owning stocks.
One of the ways to make money on securities is to buy them and then sell them when they become more expensive. But that’s not all. Some companies periodically pay dividends – they distribute part of the profits among the shareholders.
The payment of dividends is a right, not an obligation of the company. Much depends on the financial position of the joint-stock company. The decision of whether to pay dividends or not and in what amount is made by the shareholders at the general meeting. They are based on the recommendations of the board of directors.
Therefore, if you want to buy stocks in order to receive dividends, you need to correctly assemble your portfolio. To assess your chances of receiving dividends, you need to look at how often the organization provides them.
An issuer that pays dividends for 10 years in a row will be more attractive than one that does it for only two years, or one that periodically pauses and then resumes payments.
In other words, it is necessary to assess the stability and adherence of the company to its principles of dividend policy. It should be borne in mind that the dividend policy is subject to change. Therefore, it is worth re-reading it periodically.
Of course, the size of the dividend matters. But this is too obvious a criterion to which you will pay attention anyway. It would be nice to take into account how it changes from year to year.
The cheap stocks that are traded on exchanges like the NYSE and NASDAQ are not considered to be like Penny stocks and are mostly sold through small and regional brokers who promise huge profits for clients after their IPO. After all, entering a large exchange means passing a rigid listing and guarantees of the company’s honesty and compliance with all the rules.
However, the SEC believes that any share below $5 is considered a penny stock. But in practice, when they talk about such stocks, they mean a cent or about two dollars.
And while markets like the NYSE and NASDAQ are trading under $5 in stocks, many investors see this segment as the wild west of Wall Street, a wild world of investment, detached from the glitz and glossy covers of large-cap stock exchanges. While profits and losses can be very impressive, few people know about them.
Unfortunately, penny stocks have gained a reputation as a game filled with fraud and corruption. In fact, penny stocks can be the craziest adventure for an investor.
Penny stocks are
- Opportunity to earn a high percentage of profits
- Highly risk assets
Even with all the risks and disadvantages, many investors find potential windfall profits here. This is one of the reasons why such stocks are popular with investors: they can bring significant profits.
“Blue chips” is a professional investment slang term. These are reliable assets in which conservative investors invest their money, seeking to increase their capital in a systematic and risk-free manner.
Blue-chip is a name that originated in American casinos in the last century. It was in such establishments that wealthy businessmen interested in investments most often gathered. The blue chips in casinos were traditionally the largest, which led to the transfer of slang from the gambling table to the stock exchange.
In poker, a few blue chips can be worth many times more than a whole pile of red or green chips. The principle also applies to investments – in the long term, owning shares in reliable companies is more profitable than a portfolio of many unpredictable assets.
Thus, blue chips in the investment market are stocks of the most reliable, large, and highly liquid firms in the country and in a particular industry. They differ in the payment of average dividends, their price, as a rule, remains unchanged, but investors who own shares of such a company can count on regular, stable income for 10-15 years. Only a severe crisis that hits the industry or the country as a whole can disrupt the state of affairs.
What Did We Learn From This Stocks Type Guide?
Stocks can bring the following income to their owners: payments on stocks (dividends) and gains in market value (that is, market prices for stocks).
Stocks are one of the main investment instruments in the financial market and provide an opportunity to generate additional income.
Common stocks provide voting rights at shareholders’ meetings and the ability to participate in the distribution of profits but do not provide benefits in the payment of dividends.
Preferred stocks usually do not provide the opportunity to vote, but their holders receive a pre-emptive right in the distribution of dividends.
Common Questions On Different Kinds Of Stock
What Are The 4 Types Of Stocks?
We can single out the following types of stocks:
- Dividend stocks – Dividends are also part of the profits received by the organization and the company, which are distributed among the owners of its shares or securities. The received profit is sent by the company either for reinvestment or for payment to shareholders and investors
- Blue-chip stocks – Such a name for the most profitable options for investing in shares appeared on the securities market.
- Speculative stocks – Such stocks are sold, as a rule, on over-the-counter markets, where they actually paid the share of the founders in the authorized capital is only a few percent.
- Growth stocks – These are securities of a company that has either had a high-profit margin over the past few years or has significant potential to increase its volume in the near future.
What Is The Best Type Of Stock To Invest In?
The simplest thing is to start with large, well-known companies that are already popular with investors. In the professional language, they are called “blue chips”. As a rule, these are stable companies that are significant at the federal level.
What is their advantage? Their securities are always in demand. This means that you can easily buy them and you will always find a buyer if you decide to sell them.
What Are The 11 Stock Sectors?
The S&P 500 is a stock index that includes the 500 largest-cap companies listed on the US stock exchanges.
The companies in the index are divided into 11 sectors:
- IT, information technology.
- Health Care.
- Financials, the financial sector.
- Communication Services.
- Consumer Discretionary, essential goods.
- Industrials, industrial sector.
- Consumer Staples, consumer essentials.
- Real Estate.
- Energy, that is, the oil and gas sector.
- Materials, raw materials sector.