Types of Shares

When most people think of stocks, they usually think of publicly traded stocks traded on the exchange. However, it is important for investors to know the different types of stocks available, understand their unique characteristics, and be able to determine when they might represent a suitable investment. Below we outline the different share classes, with the aim of clearing up the confusion of the different share classes offered to investors.

Common and Preferred Shares

Common stock, also known as common stock, represents partial ownership of a company. This share class entitles investors to profits generated, usually paid out in dividends. Ordinary shareholders elect a company’s board of directors and vote on company policies. Holders of this share class have rights to a company’s assets in the event of liquidation, but only after shareholders of preferred stock and other debt holders have been paid. Company founders and employees typically receive common stock.

On the other hand, preferred stock or preferred stock entitles the holder to regular dividend payments before issuing dividends to common stockholders. As mentioned above, preferred shareholders are also the first to be paid back if the company is dissolved or goes bankrupt. Preferred stocks have no voting rights and are suitable for investors seeking reliable passive income.

Many companies offer both common and preferred stock. For example, Alphabet Inc., the parent company of Google, lists Alphabet Inc. (GOOGL), its Class A common stock, and Alphabet Inc. (GOOG), his favorite Class C stocks.

Growth Stocks vs Value Stocks

As their name suggests, growth stocks refer to stocks that are expected to grow faster compared to the broader market. In general, growth stocks tend to outperform during times of economic expansion and when interest rates are low. For example, technology stocks have outperformed significantly in recent years, driven by a robust economy and access to cheap financing. Investors can track growth stocks by following the Exchange Traded Fund (ETF) theme, the SPDR Series Trust – SPDR Portfolio S&P 500 Growth ETF (SPYG).

Conversely, value stocks trade at a discount to what a company’s performance would otherwise indicate, with generally more attractive valuations than the broader market. Value stocks, such as financial, healthcare and energy companies, tend to outperform during periods of economic recovery because they tend to generate reliable income streams. Investors can track value stocks by adding the SPDR Series Trust – SPDR Portfolio S&P 500 Value ETF (SPYV) to their watchlist.

Income Shares

Income stocks are stocks that provide regular income by paying out a company’s profits, or excess cash, through dividends that are higher than the market average. These stocks, think utilities, tend to have lower volatility and capital appreciation than growth stocks, making them suitable for risk-averse investors looking for a regular income stream. Investors can access income stocks through the Amplify High Income ETF (YYY).

Blue-Chip Shares

Blue-chip stocks are well-established companies with a large market capitalization. They have a long successful track record of generating reliable income and leading in their industry or sector. Conservative investors can top their portfolios with blue chip stocks, especially during periods of uncertainty. Some examples of blue-chip stocks include computer giant Microsoft Corporation (MSFT), fast food leader McDonald’s Corporation (MCD), and energy rewarder Exxon Mobil Corporation (XOM).

Cyclical and non-cyclical stocks

Cyclical stocks are directly affected by the performance of the economy and typically follow economic cycles of expansion, peak, recession and recovery. They usually exhibit more volatility and outperform other stocks during times of economic strength, when consumers have more discretionary income. Examples of cyclical stocks include iPhone maker Apple Inc. (AAPL) and sporting goods giant NIKE, Inc. (NKE). Investors can add cyclical stocks to their portfolios by purchasing the Vanguard Consumer Discretionary Index Fund ETF Shares (VCR).

On the other hand, non-cyclical stocks operate in “recession-proof” sectors that generally perform quite well regardless of the economy. Non-cyclical stocks generally outperform cyclical stocks in times of economic slowdown or downturn, as demand for core products and services remains relatively constant. The Vanguard Consumer Staples Index Fund ETF Shares (VDC) provides exposure to large-cap defensive stocks such as personal care giant The Procter & Gamble Company (PG), as well as beverage makers PepsiCo, Inc. (PEP) and The Coca-Cola Company (KO).

Defensive Stocks

Defensive stocks generally offer consistent returns in most economic and stock market environments. These companies typically sell essential products and services, such as consumer staples, healthcare and utilities. Defensive stocks can help protect a portfolio against significant losses during a sell-off or bear market. A defensive stock can also be a value, income, non-cyclical or blue-chip stock. Telecommunications giant AT&T Inc. (T) and Multinational Healthcare Cardinal Health, Inc. (CAH) are several defensive stocks included in the core holdings of the Invesco Defensive Equity ETF (DEF).

IPO stock

When a company goes public, it issues shares through an initial public offering (IPO). IPO shares are typically allocated at a discount before the company’s stock listings on the exchange. It may also have a vesting schedule to prevent investors from selling all their shares when the stock starts trading. Market commentators also use the term “IPO stocks” when referring to recently listed stocks. Investors can check for upcoming IPOs via the Nasdaq.com website.

Penny Stocks

A penny stock is a stock worth less than $5 and is considered highly speculative. While some penny stocks trade on major exchanges, many trade through the OTCQB – a mid-market over-the-counter (OTC) market for U.S. stocks managed by OTC Markets Group. Investors should consider using limit orders when placing buy and sell orders in penny stock, as these often have a wide spread between the bid and ask price.

Penny stocks rose to prominence in popular culture after the release of “The Wolf of Wall Street,” a film about a former stockbroker who ran a penny stock scam. Investors looking to bet on penny stocks should check out the iShares Micro-Cap ETF (IWC).

ESG stocks

Environmental, social and corporate governance (ESG) stocks emphasize environmental protection, social justice, and ethical management practices. For example, an ESG stock could be a company that agrees to reduce its carbon emissions faster than national and industry targets or a company that produces equipment for renewable energy infrastructure.

In recent years, ESG stocks have become popular with millennials — a socially conscious generation more likely to invest in things they believe and support. Investors can access ESG stocks by adding the Vanguard World Fund – Vanguard ESG US Stock ETF (ESGV) to their portfolio.

Bottom Line

By understanding the key differences between share classes, investors can make more informed investment decisions and manage the risks within their portfolios. Not only can investors buy different types of stocks directly, but they can also be exposed to themed stocks in a cost-effective way through ETFs.