Different Types of Stocks
You're spoiled for choice as a stock trader. But what types of stocks should you invest in? Read our market guide to learn the different ways in which they're categorised and start diversifying your portfolio strategically.
Understanding the different types of stocks available is not only important for making individual trade calls; it helps in creating a well-balanced portfolio. Read about the various ways in which they're often classified, what opportunities they present and more:
- What types of stocks can I invest in?
- Common and preferred stock
- Large-cap, mid-cap and small-cap stocks
- Domestic and international stocks
- Growth and value stocks
- IPO stocks
- Dividend and non-dividend stocks
- Cyclical and non-cyclical/defensive stocks
- Sector-specific stocks
- ESG stocks
- Blue chip stocks
- Penny stocks
- What is the best type of stock to invest in?
What types of stocks can I invest in?
In short, lots - and you can read all about them below.
Before you start, it's worth noting that many of these types are not official categories as such. Stocks can fall into multiple categories and may move between them over time, while category criteria are often subjective. Much of it comes down to terminology; read more in our trading glossary.
Still, understanding how traders commonly class different stocks may help you to spot new opportunities more easily and strategically.
Common stock vs preferred stock
One key distinction is between common and preferred stock.
Most stock that you and other regular traders will buy is common stock. When buying shares outright - rather than using derivatives like CFDs - this gives you partial ownership as a shareholder.
You'll be able to vote on matters like electing board members. Perhaps more importantly for traders, common stock can appreciate in value. If worst comes to worst, you'll be entitled to a share of the value of any remaining assets if the company gets dissolved.
Alternatively, preferred stock works more like a bond. It gives you preference - hence the name - over common shareholders to receive any dividend payments and reclaim money if the company dissolves. It can't rise in value, however, making preferred stock a lower-risk option with smaller opportunity for significant gains.
Large-cap, mid-cap and small-cap stocks
Stocks are also commonly separated by market capitalisation, which is the total worth of all their publicly available shares. The labels are self-explanatory; large-cap companies have the biggest market capitalisation, small caps have the smallest, while mid caps fall in the middle.
There are no clear definitions of what makes a large-, mid- or small-cap stock. But large-cap companies typically have market capitalisations over $10 billion, while anything under $2 billion is often classed as small cap.
These stocks tend to hold different appeals for different traders. Large-cap stocks usually represent household names with proven track records of profitability and stability, making them safe but limited in terms of growth. Mid and small caps may still be emerging, giving them greater potential for expansion - with higher risk attached, too.
Domestic and international stocks
Location is another way to think about different types of stock.
Domestic stocks typically have their headquarters based in your home country, allowing you to trade in a familiar market, while international stocks represent companies hailing from abroad. You could break international stocks down further into specific regions and countries to which you wanted to gain exposure.
The lines can blur in some cases, though. For a multinational company, you may consider the country in which it does the most business as its domestic market, yet this may be far from its headquarters or operations hub.
Growth and value stocks
Growth and value stocks are two more categories often pitted against each other.
Just as their name suggests, growth stocks are those expected to grow quicker than most. They usually reflect booming demand for a product or service and are often linked to long-term societal trends, such as technological advance or eco-conscious items. Growth sectors are often competitive, however, and can be vulnerable to economic downturns.
Conversely, value stocks are those priced slightly lower than competitors or what past performance might suggest, therefore offering perceived value. As they usually belong to mature, well-known companies, value stocks are seen to offer stability over time.
IPO stocks
IPO stocks represent companies that have recently completed an initial public offering (IPO), making their shares available to the public for the first time. They often belong to exciting young businesses looking to raise funds for their next stage of growth, generating buzz among opportunistic investors.
However, the speculative nature of IPO valuations means that share prices can be hotly debated and volatile in the first few months or even years on the market.
Dividend and non-dividend stocks
Some stocks offer regular dividend payments to shareholders, providing a valuable income source for investors. They're also known as income stocks as a result.
Not all stocks pay dividends, though, and non-dividend stocks can still offer good opportunities if they increase in price or if you speculate on them in other ways. Your preference will come down to your priorities as a trader or investor.
Cyclical and non-cyclical/defensive stocks
Economies tend to go through cycles of expansion and contraction over time.
Certain stocks, known as cyclical, have greater direct exposure to these cycles than others. This means that their share prices tend to surge when the economy expands and fall when it contracts. Examples include retail, travel and other sectors heavily dependent on discretionary spending.
Non-cyclical stocks, meanwhile, have greater resistance to economic cycles as they're usually linked to essential consumer spending, such as utilities, healthcare and food and drink staples. They're also known as defensive stocks due to their greater stability.
In summary, you might look to cyclical stocks in times of economic growth and switch to non-cyclical stocks during tougher periods.
Sector-specific stocks
It's also common to see stocks sorted by the sectors from which they hail. Popular types of industries represented in stock markets include:
- Communications, including telephone, internet and media companies.
- Energy, including companies sourcing and producing natural gas and oil, as well as mining and renewable energy.
- Financial, including companies involved in banking, accounting, insurance, credit and brokerage.
- Healthcare, including medical providers, pharmaceutical companies and health insurers.
- Industrial, including airline, railroad, aerospace, construction, machinery and logistics companies.
- Real estate, including companies that own or manage real estate as well as real estate investment trusts.
- Technology, including hardware, software and IT companies.
- Utilities, including electric, gas, water and renewable energy companies.
ESG stocks
ESG investing focuses on companies with strong environmental, social and governance credentials, as well as strong financial performance. It's seen as a more socially responsible form of investing than traditional methods which put profit above all else.
ESG stocks, then, are stocks in companies that demonstrate positive values and actions across each of these three pillars. They may operate with a low carbon footprint, for example, while treating staff ethically and demonstrating responsible leadership.
Interest in ESG investing has soared in recent times and is predicted to keep doing so, in part thanks to evidence of yielding higher returns.
Blue chip stocks
Blue chip stocks are large-cap, well-known stocks with known reputations for profitability, quality and stability. They may have earned this reputation over decades or even centuries, becoming market leaders in the process. However, no investment is risk-free, and all stocks, including blue chips, have inherent risks and market volatility.
Like large-cap stocks, blue chips tend to provide stable returns - even during uncertain times - but have limited growth potential, too.
Penny stocks
Penny stocks are far removed from blue chips, often belonging to small, poorly regarded companies. They're no longer available for pennies but typically have share prices below $5.
They're among the riskiest type of stock due to their high volatility, unclear value and appeal to scammers. They aren't available on major stock exchanges and trading volumes are low. Always do your research and manage risk.
What is the best type of stock to invest in?
With so many types of stocks from which to choose, where's best to start?
Ultimately, nothing is for certain in stock trading and there's no right answer for everyone. You can make a profit or loss from trading all these categories, so consider what suits your style or objectives.
You may be looking for short-term volatility or long-term stability, for example, or maybe you want to diversify into a particular region or sector. Trading across multiple classifications is often an effective way to generate stable returns and manage risk, as detailed in our guide to portfolio diversification.
Now that you know more about the different types of stocks, read our other stock trading guides.
With Tradu you can trade stocks via CFDs or you can own real stocks where you take ownership of the underlying asset.