What is a stock?
In the simplest term, a stock is a share that defines the ownership of an investor in a company. Also termed equity, stocks of a company can be purchased either from IPO offered by the company or from the stock market. Once you have purchased the stocks of a company, you will now have a partnership in the company’s profit and loss. These publicly traded stocks are one type of stocks but there are other types of stocks that we will discuss in short.
What is the stock market?
A stock market is a joint market of different stock exchange platforms where the buying and selling of stocks are done. The public company will be listed on a stock exchange platform from where the public can trade stocks of that company. Companies like mutual funds, ETFs, SPACs, etc. are listed on stock exchanges. Two of the biggest stock exchange platforms are NYSE and NASDAQ. Other than these, there are multiple national stock exchanges that are present in every nation.
Types of stocks
The two main types of stocks that are well known by investors are common stocks and preferred stocks.
Common stocks represent the stocks that are offered to retail investors or institutional investors initially through IPO. These stocks are also termed ordinary shares. As these stocks are termed common, they are offered in the highest volume. These stocks give ownership to the company and the owner will be paid in dividends from the profits.
Also, these stockholders are given the right to elect the board of directors for the company by voting. They can also vote on other corporate policies (if needed). Generally investing in common stocks is very profitable in the long run but also has a higher risk in case of liquidation. Yes, they can claim the company’s capital during liquidation but first bondholders, preferred shareholders, and debts will be cleared.
As compared to the common stocks, preferred stocks are less in number and the stockholders have higher priority over the dividend i.e. capital (asset) distribution. Also in the case of liquidation, the preferred stockholders will be paid first then the common stockholders. As a result, preferred stocks are less riskier than common stocks.
Preferred stocks normally do not have voting rights as common stocks. The preferred stocks lie in between common stocks and bonds. They are more attractive to the investors than bonds with higher risk and higher growth potential than bonds but have lesser risk than the common stocks. Also, these stocks are convertible to the common stocks which makes them more versatile and give higher potential to earn more in a safe way.
Common Stocks vs Preferred Stocks:
The table below shows some of the important differences between common stocks and preferred stocks.
|Preferred Stocks||Common Stocks|
|Ownership in the company||Yes||Yes|
|Growth Potential||“Limited” but are convertible to common stocks||Unlimited|
|Voting Rights||No (Typically)||Yes|
|Risk||Lesser than common||Highest|
|Liquidation||Paid before common stockholders||Paid in the last|
|Dividends||Fixed dividends||No guarantee|
IPO stocks are the stocks offered by the company to the public when it goes public. These types of stocks are at a fixed price generally at $10 for SPACs. As this price is very low as compared to the company’s growth potential, you can assume these stocks are at a discounted price. Everyone can invest in an IPO but only be selected by the public who will get the stocks.
These types of stocks provide a company’s profits through dividends. That is why they are also called dividend stocks. Income stocks are like a stable income source for investors. The main benefit of investing in income stocks is that they are less risky. Most of the companies provide the dividends quarterly but there could be companies that can provide dividends monthly, semi-annually, or annually.
Growth stocks are the stocks of the companies that are growing fast and so do their stock prices. These types of companies’ earnings are at a much higher rate than their competitors. When a company invents a new product or service that brings the market by storm, then that company can be understood as a growth company. Investors can track such companies to get very high revenue in the future.
Value stocks are the stocks of the company that are trading at a discount rate as compared to their actual market valuation. These companies have great potential but they are valued less at the moment. The main difference between value stocks and growth stocks is that the value stocks trade at cheaper prices than the company’s actual performance. There might be companies that fit in both value and growth stocks. Value stocks are more steady than growth stocks and provide stable earnings.
Large-Cap, Mid-Cap, Small-Cap, and Nano-Cap Stocks:
Market capitalization defines the size of the company based on its stocks number and the market price. The stocks can also be classified based on the company’s market cap. Stocks of the companies having a large market cap (i.e. higher than $10B) can be considered large-cap stocks. Similarly, Mid-cap stocks have a market cap between $2B – $10B, small-cap have a market cap of $300M-$2B, Micro-cap has a market cap of $50M-$300M, and finally, nano cap has a market cap less than $50M.
Stocks trading below $5 and having a very low market cap are considered penny stocks. They are like nano-cap stocks but trading below $5. These types of stock generally trade on OTC platforms and not in big stock exchanges. These companies cannot fulfill the requirements to list on big stock exchange platforms so they trade in the otc market. Penny stocks bring higher risk as they are highly unpredictable and also suffer the liquidation problem.
Blue-Chip Stocks are like Large Cap stocks but these companies not only have large-cap but also lead their respective industries. These companies are very consistent with their market performance and have gained great reputations in the long run. Blue-Chip stocks are more stable and provide steady revenue if invested well. These companies do not have very high growth potential as they are already highly grown. Stocks of companies like Apple, Google, Microsoft, etc. fall in this category.
Cyclical Stocks and Non-Cyclical Stocks:
Cyclical stocks are the stocks of the company whose market performance depends on the regional recession and expansion of the economy. They are affected by the business cycles and economic downturns such as the financial crisis. For example, a cooler-making company will have downtime in winter but will strongly rebound in summer.
Non-Cyclical Stocks are the stocks of the company that are not affected by the recession and expansion of the economy. They are less volatile and also show steady-state most of the time. There are no big demand swings which make this company stable. They perform well in every cycle but non-cyclical can come in stronger in an economic slowdown.
ESG (Environmental, Social and Corporate Governance) stocks are the stocks of the company which is also focusing on environmental impacts, social growth, and corporate governance concerns. These companies come from different sectors that help make the world a better place. That could be either by making reusable products or by creating alternatives to greenhouse emitting products. Companies following ESG principles fall in this category.
SPAC stocks are gaining popularity among investors because of their benefits over traditional IPO. Investing in SPAC stocks could also be one of the best options especially if you are looking for a lower risk. Platforms like SPACrun can help you understand different SPAC stocks and also visualize the market performance of those stocks. Subscribe to SPACrun now to get a free trial.