What is a Stock
A stock, also known as an equity, is a type of security that represents a partial or fractional ownership in a company. A share of stock entitles a shareholder to participate or share in the company’s profits through dividends. It also allows a shareholder to earn capital appreciation if the value of their shares increase.
There are two main types of stock, common stock and preferred stock, but there may also be different classes of stock.
Common stock is the most common type of stock that is issued by companies that trade on stock exchanges and it has the greatest potential for capital appreciation.
Common stockholders will frequently have voting rights, with the number of votes directly related to the number of shares owned. The Board of Directors for a company is generally responsible for deciding whether a company will pay dividends, as well as how much is to be paid.
The amount of a company’s dividend can fluctuate with earnings as well as other factors determined by the Board of Directors. Common stock dividends are typically not guaranteed and can be changed or eliminated.
Early owners of common stock in a company may have preemptive rights to maintain the same proportion of ownership in a company over time. Preemptive rights would be noted in a company charter and a shareholder should receive a subscription warrant for the right.
Preferred stock is generally considered less volatile than common stock and with lower risk, the expected capital appreciation would be less than expected as compared to common stock.
Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a higher claim to a company’s assets in the event of a company bankruptcy.
Preferred stock may also be callable, which means that the company would have the right to purchase the shares back from the shareholders at any time for any reason, although it would usually be at a premium price.
Preferred stockholders will receive their dividends before common stockholders receive their dividends and these payments will commonly be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, which differs from the variable dividend payment structure that is usually extended to common stockholders.
Advisory shares are a class of common stock that is given to business advisors and consultants in exchange for their insight and expertise. Often, a company founder or high-level executive would receive this type of stock option reward. Advisor shares typically vest monthly over a 1-2 year period on a vesting schedule with no cliff vesting and 100% single-trigger acceleration.
Different Stock Classes
A company may issue different classes of shares that have different levels of voting rights or dividend rights. One key reason that a company may use different stock classes is to better protect themselves.
Owners of companies that have been privately-owned and then become publicly traded will often create class A and class B share structures with different voting rights in order to maintain control and to make the company a more difficult target for a takeover.
Capital stock is the total amount of common and preferred stock shares that a company is authorized to issue, based on its corporate charter. Capital stock can only be issued by the company and it is the maximum number of shares that can be outstanding. The amount is listed on the balance sheet in the company's shareholders' equity section.
Market capitalization, also known as market cap, is the total market value of a publicly traded company’s outstanding shares. Market cap is used by analysts and investors to compare and categorize companies.
A mega-cap stock is the stock of a publicly-traded company that has a market cap of $200 billion or more.
A large-cap stock is the stock of a publicly-traded company that has a market cap between $10 billion and $200 billion.
A mid-cap stock is the stock of a publicly-traded company that has a market cap between $2 billion and $10 billion.
A small-cap stock is the stock of a publicly-traded company that has a market cap between $300 million and $2 billion.
A micro-cap stock is the stock of a publicly-traded company that has a market cap between $50 million and $300 million.
A nano-cap stock is the stock of a publicly-traded company that has a market cap of $50 million or less.
10 Types of Stocks
In addition to market capitalization, stocks can be analyzed, researched and identified in different groupings or categories.
IPO stocks involve privately-owned companies that list their shares on a stock exchange, which allows the shares to be available for purchase by the general public. An IPO or initial public offering helps companies to raise capital while providing early investors and employees liquidity options. IPOs are often highly sought after by investors due to their interest in investing at the early stages of a promising business idea.
International stocks are issued by companies in countries outside of your home country. For example, a US investor purchasing a Canadian mining stock. An investor will purchase international stocks to increase diversification in their portfolio as well as for speculation. International stocks have some unique risks, such as changes in exchange rates, foreign interest rates and geopolitical events.
Growth stocks involve companies where their sales and earnings are expected to increase more quickly than the average growth for the market. These companies will generally not pay dividends since much of the earnings are reinvested back into the company to promote further growth. Growth stocks tend to be higher risk as compared to value sticks
Value stocks involve companies who appear undervalued based on market fundamentals, such as a low price-to-book (P/B) ratio or a low price-to-earnings (P/E) ratio. These companies are often more mature, well-known and will generally pay a dividend. Value stocks tend to be lower risk as compared to growth stocks.
Income stocks involve companies that will pay a high dividend as compared to other stocks, which provides income to the investor. These companies, similar to value stocks, tend to be mature and well known. In the past, utility companies have been viewed as good income stocks due to their stability and higher dividend payments.
ESG stocks involve companies that take a higher priority in environmental, social and governance (ESG) factors and outcomes. Investors of ESG stocks focus less on the financials of these companies and more on certain values a company promotes, such as green energy initiatives, fair labor practices or the diversity of board members.
Blue-chip stocks involve larger companies that are well-known, established and have a strong reputation. These companies tend to be mega-cap or large-cap companies with a strong history of growth and financial stability. While not all blue-chip companies pay dividends, a large majority do pay dividends.
Penny stocks involve companies that trade for less than $5 per share. These companies tend to be smaller in size with a higher level of risk as compared to other categories of stocks. Typically, penny stocks have low liquidity, wide bid-ask spreads and prone to market manipulation, which is why it is viewed as highly speculative.
Cyclical stocks involve companies that produce non-essential or discretionary goods and services which are more sensitive to economic cycles. The demand will fluctuate based upon general economic conditions and the business cycle. Cyclical stocks will usually have higher volatility but perform best during periods of economic strength.
Non-cyclical stocks involve companies that sell products considered necessary and essential to life. Since they are less sensitive to economic cycles, they are also referred to as defensive stocks. Non-cyclical stocks tend to be resistant to economic downturns due to the stable underlying demand for necessary goods and services.