It’s easy to think of the stock market as a place to buy and sell a single type of stock, but there are many different types of stocks to buy, sell, and invest in. Let’s look at a few of the kinds of stock on the stock market as well as their unique advantages or disadvantages.
The 3 Major Types of Stocks
Three major divisions divvy up the stock market into smaller pieces. Here are the three main types of stocks:
- Common stock – Common stocks make up the majority of the buzz on Wall Street. A common stock is a simple piece of ownership in a company. Common stock holders have a right to a company’s profits and value, as well as a vote in major decisions and board elections. These are the shares that you see quoted prices for online, in newspapers, or financial publications. Common stocks may or may not pay a dividend, and are considered riskier than preferred stock.
- Preferred stock – Preferred stock is more like a bond than common stock. Preferred shares give investors some level of ownership in a company, but preferred shareholders do not have voting rights. Preferred stocks are issued with known dividends much higher than the common stock. Preferred shareholders are subordinate to debt investors and senior to common stockholders in the event of a liquidation or bankruptcy, making them generally safer than common stocks. Preferred stocks can be callable, meaning that the issuing company can buy back issued preferred stocks at a premium on its own accord. Shares can also be convertible, allowing a preferred stockholder to convert their preferred shares into common stock at some point in the future.
- Share classes – Within the boundaries of common or preferred shares there are different share classes. For example, Facebook has a dual-class system that allows Mark Zuckerburg to own 28% of Facebook’s stock but control more than 50% of all voting power. A dual-class structure is nothing new; Ford Motors has two classes that allow the Ford family to elect 40% of the board of directors, while Berkshire Hathaway has two share classes that give class A shareholders more than six times more voting power than class B shareholders.
New Ways to Divide the Market
You really can slice and dice the market as much as you want. Some would say there are other ways to divide the market by looking at a stock’s style:
- Value stocks – Value stocks tend to be companies in slow-growing industries that trade for lower multiples of their earnings power. Examples of value stocks might include railroads, utilities, consumer staple producers (Coke or Clorox), and other industries that are simply…well, boring and unexciting.
- Growth stocks – Growth stocks are companies that are expected to grow significantly in the future and therefore trade for higher earnings multiples. Growth companies can be found in any industry, but they are most synonymous with the ecommerce, consumer technology, services, as well as restaurant brands and franchises.
Divisions by style are much more subjective than divisions by legal type of stock. Common stocks are obviously different than preferred stock. The lines between growth and value stocks, for instance, aren’t always so clear.
Having some kind of knowledge about the different types of stocks should lead to deeper thinking about diversification. A really truly 100% diversified portfolio would include all different kinds of stocks – class A or class B common stocks, preferred stocks, or convertible preferred stocks.