Understanding Stock Types: A Guide for Investors

There are many different types of stocks in which you can invest based upon your financial position, your appetite for risk and your investment goals. In order to determine in which type to invest, you first have to determine what you want the stock to do for you. Do you plan to hold the security long term, or are you a day trader? Are you looking for capital gains in your investments, or is income your main objective? How you answer these questions will give you a good idea of which type of stock you should be considering for your portfolio.

A company’s stock offerings generally fall into one of two categories: common stock or preferred stock. Common stock represents the basic equity ownership in a corporation. For total return (dividend income and capital gains), no publicly traded investment offers more potential over the long term than common stock. Stockholders are entitled to vote for directors and on other important company matters. They also participate in the appreciation of share values and benefit from any dividends declared from corporate earnings that remain after debt obligations and preferred stock dividends are met.

Preferred stock is an equity with characteristics of both bonds and common stock. Because it is not debt, however, it still carries more risk than bonds. The dividends on preferred stock are usually a fixed percentage of the par, or face, value. Thus, like bonds, shares are sensitive to interest rate fluctuations. Prices go up when interest rates go down, and vice versa. Paying preferred dividends is not a contractual obligation of the issuer, however. Although, as stated previously, they are payable before common stock dividends, they can be skipped altogether if corporate earnings are low. Also, if the issuer goes bankrupt, though the claims of preferred stockholders come before those of common stockholders, neither will share in any liquidated assets until bondholders are paid in full, because bonds are debt. Listed below are several types of stocks commonly traded in the securities market:

• Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have track records of paying regular dividends and are valued by investors seeking relative safety and stability. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable.
• Penny stocks are low-priced, speculative and risky securities traded over-the-counter (OTC), in other words, outside one of the major exchanges.
• Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors looking for current income that will gradually grow over the years as a way to offset inflation.
• Growth stocks are securities that appreciate in value and yield a high return. Their profits are typically reinvested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment.
• Value stocks are securities that investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company.

This is far from an all-inclusive list of the available classifications of stocks. Research and use all of the resources at your disposal to find the right security to fulfill your needs and meet your goals. For more information on these and other types of stocks, read Stock Basics: Different Types of Stocks.