Investing in the stock market can be risky, especially if you don't diversify your portfolio. Depending on your investment strategy, it's a good idea to invest in a variety of stocks, as well as other assets such as bonds, mutual funds and exchange-traded funds (ETFs).
As you construct your portfolio, the stocks you invest in will depend on your individual investment goals, familiarity with the stock market, risk tolerance and more. Understanding the different types of stocks that are available can make it easier to determine where to invest your money.
5 of the Most Popular Types of Stocks
| Common Stock | Preferred Stock | Growth Stocks | Value Stocks | Income Stocks | |
|---|---|---|---|---|---|
| Key features | Ownership share with voting rights | Fixed dividend; priority over common stocks | Above-average price appreciation | Priced below their perceived value | Regular dividend payments |
| Benefits | Voting rights; price appreciation potential | Steady income; lower risk compared to common stock | Higher return potential | Potential for price rebound | Consistent income; reduced risk |
| Drawbacks | Last in line during bankruptcy; dividends aren't guaranteed | No voting rights; less upside potential with prices | Higher risk; rarely pays dividends | Prices may not recover (value trap risk) | Less price appreciation compared to growth stocks |
| Best for | Most investors | Income-focused, risk-averse investors | Investors with higher risk tolerance | Investors looking for bargains | Investors who want steady income |
1. Common Stock
Common stock is a share of partial ownership in the company that issued it. When you think about the stock market, you're generally thinking about common stock.
In addition to benefiting from potential stock price appreciation and dividends, common stockholders also get voting rights when it comes to electing the company's board of directors and choosing corporate policies.
Reminder: It's important to note that a single stock can fit into more than one category. For example, a company can be a common stock, large-cap, blue-chip and income stock all at once.
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2. Preferred Stock
Companies also issue preferred stock, which pays a regular dividend, even if the company's common stock doesn't. If the company is behind on dividend payments or goes bankrupt and liquidates its assets, preferred stockholders get priority over common stockholders.
That said, preferred stockholders don't get voting rights. Also, while preferred stocks tend to be less risky, you may not get the same price appreciation as a common stockholder in the same company. Preferred stocks also aren't as widely traded on stock exchanges as common stocks.
Here's a quick look at how common and preferred stock compare:
- Dividends: Common stock dividends vary and aren't guaranteed. Preferred stock typically pays a fixed dividend on a regular schedule.
- Voting rights: Common stockholders generally have voting rights. Preferred stockholders typically do not.
- Priority in bankruptcy: Preferred stockholders have a higher-priority claim on assets than common stockholders.
- Price appreciation: Common stock tends to have more upside potential. Preferred stock is generally more stable but offers less growth.
- Risk level: Preferred stock is typically considered less risky than common stock.
If your priority is to earn income and minimize risk, consider preferred stocks.
3. Growth Stocks
Growth stocks are stocks whose prices are appreciating faster than the market average. These companies typically don't pay dividends, opting instead to reinvest profits into further growth. However, investors may benefit from stronger returns in the form of price appreciation.
Because growth stock companies are often putting significant resources into expansion, they may be more susceptible to business or economic downturns. Consider them if you have a somewhat high risk tolerance.
4. Value Stocks
Value stocks have a low price relative to their earnings, typically because they've lost favor with investors for one reason or another. They can be growth or income stocks.
When comparing stocks within an industry, those with a below-average price-to-earnings (PE) ratio are considered value stocks. You may consider investing in value stocks with the hope of a short-term price rebound. Before you do, make sure you understand the reason for the low PE ratio.
Learn more: Growth vs. Value Investing: Which Is Better?
5. Income Stocks
While companies of all shapes and sizes pay dividends to their shareholders, income stocks tend to be larger companies that pay them regularly. As a result, they're typically less risky than growth stocks.
A subset of income stocks worth knowing about are dividend aristocrats, which are companies that have increased their dividend payouts every year for at least 25 consecutive years. They're often considered a mark of financial stability and long-term reliability.
You may consider income stocks if you want to minimize your risk and receive consistent income from your investments.
6. Large-Cap Stocks
Large-cap stocks have a market capitalization—the total value of a company's shares—of $10 billion to $200 billion. Stocks with a market cap higher than that are generally considered mega-cap stocks.
Large-cap stocks typically have a strong financial reputation and steady growth. They also tend to pay dividends, making them less risky compared to mid- and small-cap stocks.
To calculate a company's market cap, multiply the number of outstanding shares of common stock by the current stock price.
Example: There are currently 100 million outstanding shares of a company, trading at $200 per share. The company's market cap, then, is $20 billion (100 million x $200 = $20 billion).
7. Mid-Cap Stocks
A mid-cap stock typically has a market cap ranging from $2 billion to $10 billion. These companies are often well-established, but unlike most large-cap stocks, they may be experiencing high growth as they increase their market share or competitiveness in their industries.
While mid-cap stocks tend to be riskier than large-cap stocks—albeit with greater growth potential—they're not as risky as small-cap stocks.
8. Small-Cap Stocks
Small-cap stocks have a market capitalization of $250 million to $2 billion. Stocks with a market cap below that minimum are often called micro-cap stocks.
Small-cap stocks are often young companies in emerging or niche industries. They tend to have more upside potential than mid- and large-cap stocks, but there's also a greater risk of loss, especially during a business or economic downturn. They tend to be more popular among investors with a high risk tolerance.
Learn more: How to Determine Risk Tolerance for Investing
9. Blue-Chip Stocks
Blue-chip stocks get their name from the blue poker chip, the most valuable chip in the classic three-chip set. These are large, well-established companies that are generally leaders in their industries.
There's no strict definition for what qualifies as a blue-chip stock. Some investors consider a stock blue chip if it's included in a specific stock index, such as the Dow Jones Industrial Average, while others may base their definition on the company's dividend history or market cap.
In general, blue-chip stocks are typically less risky than others, with a strong financial track record and regular dividends. Consider them if you have a low risk tolerance or want to diversify a portfolio that also contains riskier investments.
10. International Stocks
International stocks represent shares of a company that operates outside of the U.S. You may be able to buy international stocks on a U.S. stock exchange in the form of an American Depositary Receipt (ADR).
International stocks can help diversify your portfolio because they're subject to different market forces than domestic stocks. At the same time, your return can be affected by geopolitical issues, foreign regulations and currency exchange rates, so research carefully before investing.
11. IPO Stocks
An initial public offering (IPO) occurs when a company first sells shares of its stock to the public. Individual investors have historically had little to no access to IPO stocks, but some online brokers have recently made it easier for individual investors to get in on them.
While IPOs can create significant short-term gains, that's not always the case. Going public doesn't guarantee that a company is a long-term winner, so IPO stocks are best suited for investors with a high risk tolerance.
Example: When Facebook had its IPO in 2012, analysts predicted it would experience huge growth in its share prices on the first day of trading. However, due to tech issues where trades didn't go through or were billed at the wrong share price, its share price never increased from the $38 it opened at. Additional controversy caused the stock to drop 16% within the first five days of trading, though the stock has since seen success.
12. Penny Stocks
Penny stocks are issued by very small companies and generally trade at less than $5 per share. Because they typically aren't sold on major stock exchanges, they lack the same transparency as traditional stocks and are highly speculative. Avoid them unless you're an experienced investor with an extremely high risk tolerance.
13. Cyclical Stocks
Cyclical stocks tend to perform well when the economy is strong and poorly when the economy contracts. Companies that offer products and services consumers spend less on during a downturn, such as airlines, retailers and restaurants, typically have cyclical stocks.
Cyclical stocks can be a good buy when the economy is recovering from a recession, or they can be a good fit for long-term investors who don't mind short-term volatility.
14. Defensive Stocks
Unlike cyclical stocks, defensive stocks can be more resilient during economic downturns. This is primarily because they offer products or services that consumers continue to need regardless of the state of the economy.
Examples of defensive stocks include utility companies, health care providers, grocery chains and pharmaceutical firms. Consider investing in defensive stocks if you have a low risk tolerance or anticipate a market downturn.
Learn more: How to Avoid Emotional Investing
15. ESG Stocks
Short for environmental, social and governance, ESG stocks are companies evaluated based on factors like sustainability, social responsibility and corporate governance practices. Consider these stocks if you want your investment portfolio to align with your personal values.
Frequently Asked Questions
How Can I Choose the Right Types of Stocks to Invest In?
Choosing the right types of stocks starts with understanding your financial goals, time horizon and risk tolerance. A younger investor with decades until retirement may be more comfortable with growth, small-cap and even international stocks. Conversely, someone closer to retirement may prefer income and blue-chip stocks.
It can help to develop a clear investment strategy before you start trading. If you're unsure where to begin, consider consulting a financial advisor.
What Is the Best Type of Stock for Beginners?
There's no single best type of stock for beginners, but many financial experts recommend starting with large-cap or blue-chip stocks because they tend to be more stable and easier to research.
Index funds and exchange-traded funds (ETFs) that hold a broad mix of stocks are also popular starting points because they offer built-in diversification for your portfolio.
Are Bonds a Type of Stock?
No. Bonds and stocks are two different types of investment securities. When you buy a stock, you're purchasing partial ownership in a company.
In contrast, when you buy a bond, you're lending money to a company or government agency in exchange for interest payments. This is why bonds are also called debt securities. Bonds are generally less risky than stocks, but they also tend to offer lower long-term returns.
Start Building Your Investment Portfolio
As you decide how to invest your money, it's important to develop your investment strategy in a way that works with your current financial situation and your long-term financial goals. Understanding how the different types of stocks work can make it easier to know which ones to buy and which ones to avoid. If you're not sure about how to get started, finding an experienced financial advisor can help.