When it comes to investing, there are many different types of stocks to choose from. Common and preferred shares are the two main types of stocks, but there are also other classes such as large cap, mid-cap, small-cap, growing stocks, and value stocks. In this article, we'll explore the different types of stocks and their characteristics so you can make an informed decision when investing. Common shares are the most basic type of stock and are issued by all publicly traded companies.
When you own common stock, you have the right to vote on board members and other corporate matters at a company's annual meeting. Generally, one share equals one vote. Common stock can offer great potential for price appreciation if the company performs well, and some common stocks also pay regular dividends. However, if the company goes bankrupt, common shareholders are the last in line to be reimbursed.
Preferred shares offer some of the advantages of both common stocks and bonds in a single security. Preferred shareholders receive guaranteed dividends and are more likely to receive some form of compensation if the company becomes insolvent. However, preferred shareholders do not have the right to vote. Some companies choose to issue multiple classes of shares, such as class A shares and class B shares.
This is usually done to give key investors greater control over the company's affairs. Alphabet Inc., for example, has three classes of stock: class A (GOOGL), class B (held by founders and first investors with 10 votes per share), and class C (GOOG) which has no voting rights. Large cap stocks are those with a market capitalization of more than $10 billion. These companies tend to grow more slowly than newer and smaller companies, so investors shouldn't expect excessive returns when investing in large cap stocks.
Mid-cap stocks may offer potential for growth as they expand their share in the markets in which they operate. Small-cap stocks offer investors tremendous growth opportunities but are among the riskiest investment options due to their greater market volatility. Growing stocks are companies that are expanding their revenues, profits, stock prices, or cash flows at a faster rate than the overall market. The goal when investing in growing stocks is to see strong price appreciation over time.
Growing companies tend to reinvest their profits in the business and may not pay dividends. Value stocks are strong companies that are being undervalued by the stock market. Securities investors try to discover companies in this category and buy their shares in hopes that the rest of the market will realize their true value. Common stocks represent ownership of a company and a claim (dividends) for a portion of its profits.
In the long term, common stocks produce higher returns than almost any other investment but come with greater risk - if a company goes bankrupt and is liquidated, common shareholders will not receive money until creditors, bondholders and preferred shareholders are paid. When it comes to investing in stocks, it's important to understand the different types available so you can make an informed decision about which ones best suit your needs.
