Types of Stocks#

Walk into a grocery store, and you'll find apples organized by type: Honeycrisp for sweetness, Granny Smith for tartness, Fuji for crunch. The stock market works similarly. Understanding stock types helps you pick the right ones for your portfolio's "recipe."

Common Stock vs. Preferred Stock#

The two fundamental classes of stock are common and preferred—and the difference matters more than most beginners realize.

Common Stock#

Common stock is what most people mean when they talk about "stocks." It's the standard form of ownership that comes with:

• Voting rights on company matters (typically one vote per share)
• Variable dividends that can increase, decrease, or be eliminated
• Higher growth potential as the company succeeds
• Last priority in receiving assets if the company fails

Most individual investors own common stock because it offers the best opportunity for capital appreciation.

Preferred Stock#

Preferred stock is a hybrid between stocks and bonds:

• Fixed dividends that are typically higher and more predictable
• Priority over common stock for dividend payments
• Limited or no voting rights in most cases
• Less price volatility than common stock
• Less upside potential when the company grows

Practical Example: Bank of America pays common shareholders a variable dividend (currently ~$0.24/quarter). Its preferred shares pay a fixed 6% annually. If you invest $10,000 in preferred shares, you'll receive about $600/year reliably. Common shareholders might get more—or less—depending on bank profits.

Growth Stocks vs. Value Stocks#

This is one of the most important distinctions in investing. Understanding it will shape your entire investment strategy.

Growth Stocks#

Growth stocks are shares in companies expected to grow faster than the overall market:

• Reinvest profits rather than paying dividends
• Trade at higher valuations (high price-to-earnings ratios)
• Found in innovative sectors like technology and healthcare
• More volatile but potentially higher returns

How to Identify a Growth Stock#

Look for these telltale signs in any stock screener or company report:

Real-World Example: Is Apple a Growth Stock?

Let's analyze Apple using the metrics above:

• Revenue growth: ~8% (moderate, not explosive)
• P/E ratio: ~28 (elevated but not extreme)
• Dividend: Yes, ~0.5% yield
• Position: Dominant but mature

Verdict: Apple is a mature growth stock—it was a pure growth stock in the 2010s but now shows characteristics of both growth and value. This is common for successful companies as they mature.

Value Stocks#

Value stocks are shares in companies that appear underpriced relative to their fundamentals:

• Pay regular dividends to shareholders
• Trade at lower valuations (low price-to-earnings ratios)
• Established, mature businesses with stable earnings
• Less volatile with steadier, more predictable returns

How to Identify a Value Stock#

Real-World Example: Is Coca-Cola a Value Stock?

Analyzing Coca-Cola:

• P/E ratio: ~24 (a bit high for pure value)
• Dividend yield: ~3% (solid income)
• Revenue growth: ~5% (stable, predictable)
• Business: 137-year-old beverage company

Verdict: Coca-Cola is a dividend aristocrat—a value stock with consistent dividend growth. It's defensive and stable but won't deliver explosive returns.

The Growth-Value Spectrum#

Stocks exist on a spectrum, not in binary categories:

Classification by Market Capitalization#

Market capitalization (or "market cap") measures a company's total market value:

Market Cap = Stock Price × Total Shares Outstanding

Example: If Apple trades at $200 with 15 billion shares outstanding:

• Market Cap = $200 × 15B = $3 trillion (the world's most valuable company)

Companies are typically grouped into these categories:

Blue-Chip Stocks#

Blue-chip stocks are a special category of large-cap stocks known for their quality:

• Industry leaders with long track records
• Consistent dividend payments
• Household name brands
• Found in major indices like the Dow Jones

Examples: Apple, Microsoft, Coca-Cola, Johnson & Johnson, Procter & Gamble

Sector Classifications#

Stocks are also grouped by the industry they operate in. The Global Industry Classification Standard (GICS) defines 11 sectors:

Defensive vs. Cyclical Sectors#

Understanding sector rotation helps you position your portfolio for different economic environments.

Domestic vs. International Stocks#

Diversifying beyond your home country adds another dimension to your portfolio.

Types of International Investments#

Why Invest Internationally?#

International Investment Risks#

How to Access International Stocks#

1. ADRs (American Depositary Receipts): Foreign stocks traded on US exchanges (e.g., BABA for Alibaba)
2. International ETFs: Baskets like VEU (all non-US), EEM (emerging markets)
3. International Mutual Funds: Actively managed foreign stock funds
4. Direct Foreign Investment: Buying on foreign exchanges (complex, higher costs)

Matching Stock Types to Your Goals#