How Are Stocks Categorized and What Kind of Stocks to Invest In?

While there is general excitement for stock trading, you need to figure out the kind of stocks out there and choose them based on your investment goals.

Looking to actively invest in the stock market? There is much greater excitement surrounding the stock market, but before you sign up with an experienced online stock trading brokerage, here’s a look at the kind of stocks out there and their categorization so you can figure out where you need to invest in. Motley Fool analyst Dan Caplinger gives his insight.

Kinds of Stock

Common Stock

Now when you hear people saying they “invest in stocks” or “trade stocks,” they usually refer to common stock. Common stock basically gives you part ownership — corresponding with the value of the share – in a company. When you buy stock in a company, you’re a shareholder in the company. Shareholders are provided with the right to get a share of the company, proportional to the value of the stock they hold, if the company goes through a dissolution process.

If the company in which you hold shares keeps performing profitably, the value of the stock you hold keeps rising, and if you sell the stock, you make a profit. With common stock, the potential for an upside is great, but it is also risky if the company fails to perform well. In that case the stock value reduces, and you could be in for a loss if you sell your stock. Worse, if the company totally fails without leaving any assets, you could be getting basically nothing.

Preferred Stock

To avoid that, people invest in a company’s preferred stock, if the company offers it. Preferred stock gives shareholders of the stock preference in providing a certain amount over the shareholders holding common stock – if the company goes through a dissolution process. If the company pays dividends, preferred shareholders have the right over the common shareholders to receive them. But companies won’t always offer preferred stock, and often they never will. Common share trading therefore has higher volumes.     

Dividend Paying and Non-dividend Stocks

We talked about dividends. Stocks are also classified on the basis of whether they pay dividends or not. Dividend stocks pay dividends to shareholders regularly. If you own a dividend stock you’ll be getting monthly payments, which gives you a great source of income. That’s why dividend stocks are quite sought after. Of course, the dividend amount per share can be greater or lesser depending on the company that’s offering it. And the number of shares you hold also determines if the dividend is substantial enough for you.

Companies offering non-dividend stocks don’t pay dividends, so you won’t get the regular income. However, if those stocks keep rising in value over time, they can also be pretty strong investments. It isn’t mandatory for companies to pay dividends for their shareholders, though that trend has been rising now.  

Classification Based on Market Capitalization

The other major classification of stocks is on the basis of their market capitalization, their total share worth. Large-cap stocks are those of companies having the greatest market capitalizations. These stocks generally have $10 billion or more in terms of market capitalization. Mid-cap stocks have lesser market capitalization, generally in the region from $2 billion to $10 billion, while small-cap stocks are even smaller, with market capitalization below $2 billion.

While small-cap and mid-cap stocks have tremendous potential for growth, they tend to be riskier. But if growth is what you’re looking for, and are prepared for some kind of risk, you’d go for them. Large-cap stocks are safer options. Since they’ve already reached the large market capitalization stage, their potential for growth is less, but they are safer investments.  

These are general characteristics, though not all stock in each of the categories need to perform in the exact same manner. With direct access trading platforms, you just need to set your investment goals and get started.