Types of stocks

The first split most beginners learn is between common stock and preferred stock. Common stock gives you partial ownership of a company. You get voting rights at shareholder meetings and a share of profits via dividends, when the company chooses to pay them.

Preferred stock is closer to a hybrid between equity and debt. Preferred shareholders typically receive a fixed dividend that takes priority over common stock dividends. The trade-off is that preferred shareholders usually have no voting rights, and the upside is more limited if the company's value rises sharply.

For most retail investors, the word stock means common stock. Preferred shares are less commonly traded by individuals and are often used by institutional investors or as part of structured income strategies.

Growth stocks are shares of companies expected to grow revenue and earnings faster than the broader market. Tech companies like Tesla and Nvidia are commonly classified as growth stocks. They tend not to pay dividends because they reinvest profits into expansion. Their share prices reflect future expectations, which means they can be volatile.

Value stocks are companies trading at a price that looks cheap relative to fundamentals like earnings, book value, or cash flow. Banks, utilities, and mature industrial companies often fall into this category. They tend to pay steady dividends and have less dramatic price swings.

Many beginner portfolios include a mix of both. Growth stocks offer higher potential return at higher risk. Value stocks offer steadier income and downside protection. Index funds like the S&P 500 naturally include both.

Stocks are also categorized by market capitalization, which is the total value of all the company's outstanding shares. The standard breakdown is:

Large-cap stocks tend to be stable, well-established businesses. Apple, Microsoft, and JPMorgan are large-caps. They are widely covered by analysts and tend to have lower price volatility.

Small-cap stocks are smaller, less-followed companies. They have higher growth potential because their starting size is smaller, but also higher risk. A small-cap can double in a year. It can also lose 80% in the same time frame. Mid-caps sit in between, often appearing in portfolios as a balance between stability and growth.

Blue chip stocks are large, well-established companies with long track records. The term overlaps with large-cap but emphasizes reputation and reliability. Examples include Coca-Cola, Procter & Gamble, and Berkshire Hathaway.

Dividend stocks are companies that pay regular dividends to shareholders. They tend to be older, profitable businesses. Investors looking for passive income often build portfolios around dividend stocks.

Sector stocks are grouped by industry: technology, healthcare, finance, energy, consumer goods. Sector performance varies depending on economic conditions. Tech tends to outperform during growth periods. Defensive sectors like utilities hold up better during downturns.

International stocks are shares in companies based outside your home market. Buying Apple from Manila, Mumbai, or Lagos counts as international stock investing. Diversifying into international stocks reduces dependence on any single economy.