If you are new to stocks or want to learn about all the different types of stocks, then this guide is perfect for you.
What Are Stocks?
Stocks, sometimes referred to as equities, are an investment through which you purchase part ownership in a company. You pay a price for this piece of ownership, and as time goes on it may become more or less valuable based on any number of factors.
Being a part-owner of a company affords you certain rights, one of which is the right to vote on decisions to be made by company ownership. There are exceptions to this that will not be covered in this post for the sake of simplicity.
Companies may also decide to pay out a portion of their profits to their owners in the form of a dividend. Dividends are cash distributions, paid by companies to shareholders, usually on a quarterly basis.
Different Types of Stocks
When it comes to stocks there are several different ways that they can be categorized. Each type of categorization focuses on a specific characteristic of the stock.
Stocks can be categorized by:
- Market-cap
- Location
- Market segment
- Investment purpose
Market-Cap
Market-cap is essentially how much a company is worth based on the stock price of the company. (Calculated by multiplying the current price of the stock and the amount of that stock in circulation.)
Stocks can be categorized as any of the following:
- mega cap companies (worth more than $200 billion)
- large cap companies (worth more than $10 billion and less than $200 billion)
- mid cap companies (worth between $2 billion and $10 billion)
- small cap companies (worth between $300 million and $2 billion
- micro cap companies (worth between $50 million and $300 million)
- nano cap companies (worth less than $50 Million)
Location
Where a company does business is another way to classify stocks. Stocks are said to be domestic if they conduct the majority of their business in the United States and International if they conduct most of their business abroad.
Furthermore these locations can be classified as either developed markets or emerging markets. Developed markets have been around awhile and are usually seen as established and less risky. European markets or the U.S. market are good examples of developed markets.
Emerging markets are typically riskier but offer the potential for higher returns. Someone who invests in the Venezuelan stock market would be an emerging market investor.
Market Segment
Stocks can be classified by the line of business that the company is in. Some examples include:
- Financial stocks- banks, insurance companies, and really anyone in the finance industry
- Tech stocks- From internet companies like Facebook and Google, to Apple, Tesla, and beyond.
- Energy stocks- Companies that power the world, from Exxon Mobile to First Solar.
- Consumer discretionary stocks- Stocks focused on consumables that usually might be foregone in a recession. Think Starbucks, Lululemon, or Disney.
Investment Purpose
The last way to classify the different types of stocks that we will discuss is by investment purpose.
Stocks that people typically invest in for their high and reliable dividend payouts are classified as dividend stocks. Dividend stocks are also a great source of passive income.
Stocks in which people invest due to an expectation of strong growth in the value of the company are classified as growth stocks.
Stocks that have consistently strong earnings, good fundamentals, and are purchased at a relative discount to their peers would be classified as value stocks. Stocks with that have the same characteristics as value stocks but do not trade at a relative discount to their peers are usually referred to as blue chip stocks.
Test Your Knowledge
Here’s a fun way to test what you now know. If you haven’t already, sign up for Robinhood with this link. Not only does Robinhood let you trade commission free, but If you complete the sign up through that link you will be awarded a free stock. Try to figure out what kind of stock it is through a bit of research!
For example, if you got a share of Apple you could say that you own an international, tech, mega cap, blue chip stock. Now don’t you sound smart!
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