Understanding the different types of stocks: A guide for investors

Summary

Stocks come in different categories, each with distinct characteristics. Understanding them helps investors better manage risk, diversify their portfolios, and align investment choices with their financial goals.

What are the different types of stocks? 

There are two main types of stocks that investors will encounter when searching for a quote or researching a stock. Companies can issue two different types and each serves a different purpose in the companies capital structure. Common stocks which are the most well-known represent ownership in a company and provide investors with a range of opportunities, risks, and returns. The second type are preferred shares which are a hybrid security that blends features of stocks and bonds.  

What are preferred shares?

Preferred shares are a special category of stock that combines elements of both equity and fixed-income investments. A key feature of preferred shares is that they pay fixed dividends to preferred shareholders before any dividends are paid to common shareholders.  

Preferred shares offer stable, predictable income through fixed dividends that are determined and reset every 5 years making them attractive for income-focused investors as an alternative to investing in bonds. However, their prices fluctuate with market conditions and are highly sensitive to interest rates changes. Dividend payments may be suspended during financial distress. An investor that wants to invest in the future potential of a company and hopefully be rewarded with an increasing share price will look towards common shares because preferred being more fixed-income like will not benefit from this.

What are common stocks? 

Common stocks, sometimes referred to as ordinary shares, are a piece of ownership in a company. Common stocks are subject to market volatility. Prices can fluctuate widely based on company performance, industry trends, and broader economic conditions. If the company performs well, the value of your common shares can rise substantially. If it falters, there is a risk that the share price will drop significantly or even go bankrupt.  

Investors tend to classify common stocks by market capitalisation, by sector, by geographic location (like international stocks) but they also fall into certain themes that we will explore below. 

What are Growth stocks? 

Growth stocks are shares in companies expected to expand faster than the market average. They typically do not pay dividends, opting instead to reinvest earnings to fuel expansion. These stocks can offer substantial capital gains but are often more volatile and carry higher risk. 

What are Value stocks?

Value stocks are often mature, well-known companies with reliable earnings whose shares are considered undervalued relative to their fundamentals. Investors seek these stocks for their potential to rebound and deliver solid returns. Value stocks may pay dividends and tend to be less volatile than growth stocks, but their recovery can take time. 

What are Blue Chip stocks?

Blue-chip stocks sometimes referred to as quality stocks represent large companies that are often industry leaders with a long-established history of stable earnings, strong balance sheets and regular dividends. They tend to be favored by long-term investors because they typically offer more safety and the share prices are less volatile. Blue-chip stocks offer lower risk, but also typically provide more modest returns compared to growth stocks. 

What are Income stocks?

Income stocks , also called Dividend stocks - refer to any stock that generates income for the investor, usually in the form of dividends. REITs can also be added to this category as well, because they usually pay a monthly distribution. Investors who have a need for regular income from their portfolio because of withdrawals due to retirement or other projects will be drawn to these types of securities. These companies tend to be in mature industries with lower growth rates and generate excess cashflow that the company can pay out to their shareholders. 

What are speculative stocks?

Speculative stocks include any stock with uncertain prospects. Speculative stocks are seen as potentially high risk and high reward investments, where share price can quickly shoot up or crash down.  Risk averse investors often avoid them. 

How to find different types of stocks? 

Online brokers will generally provide their clients with different fundamental or technical analysis tools to support them in their decision-making process. Other tools can be used to help create curated lists of investment ideas or themes by filtering out stocks (common or preferred) with investment criteria.

How to tell the difference between common and preferred shares? 

Many companies that pay common share dividends also offer preferred shares, certain sectors such as financial services, telecoms and utilities will offer several different types of preferred share series. The initial stock symbol will be the same, but investors can distinguish between them because a .PR will be added.

How do different types of stocks shape your investment portfolio?

Understanding the various types of stocks traded on exchanges is crucial for building a diversified investment portfolio. Common stocks offer growth potential but come with higher risk. Preferred shares provide income stability and greater protection in adverse situations, but limit growth. Growth, value, income and blue-chip stocks each offer unique features suited to different investment strategies. By weighing the risks and benefits of each type, investors can make better choices and achieve their financial goals. Informed investing starts with a clear grasp of stock fundamentals, risk factors, and the advantages each category brings to the table. 

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