A stock is an investment into a public company. When a company sells shares of stock to the public, those shares are typically issued as one of two main types of stocks: common stock or preferred stock. Here’s a breakdown.
If you’re new to investing in stock and looking to buy a few shares, you likely want to invest in common stock, which is exactly what the name suggests: the most common type of stock.
When you own common stock, you own a share in the company’s profits as well as the right to vote. Common stock owners may also earn dividends — a payment made to stock owners on a regular basis — but those dividends are typically variable and not guaranteed.
The other main type of stock, preferred stock, is frequently compared to bonds. It typically pays investors a fixed dividend. Preferred shareholders also get preferential treatment: Dividends are paid to preferred shareholders before common shareholders, including in the case of bankruptcy or liquidation.
Preferred stock prices are less volatile than common stock prices, which means shares are less prone to losing value, but they’re also less prone to gaining value. In general, preferred stock is best for investors who prioritize income over long-term growth.
» Learn more: How to make money investing in stocks
Common vs. preferred stock
Other stock categories
Within those broad categories of common and preferred, different types of stocks are further divided in other ways. Here are some of the most common:
Company size: You might’ve heard the words large-cap or mid-cap before; they refer to market capitalization, or the value of a company. Companies are generally divided into three buckets by size: Large cap (market value of $10 billion or more), mid-cap (market value between $2 billion and $10 billion) and small-cap (market value between $300 million and $2 billion).
Industry: Companies are also divided by industry, often called sector. Stocks in the same industry — for example, the technology or energy sectors — may move together in response to market or economic events. That’s why it’s a good rule of thumb to diversify by investing in stocks across sectors. (Just ask someone who held a portfolio of tech stocks during the dot-com crash.)
Location: Stocks are frequently grouped by geographic location. You can diversify your investment portfolio by investing not only in companies that do business in the U.S., but also in companies based internationally and in emerging markets, which are areas that are poised for expansion. (Here’s more on how to invest in international stocks.)
Style: You might hear stocks described as growth or value. Growth stocks are from companies that are either growing quickly or poised to grow quickly. Investors are typically willing to pay more for these stocks, because they’re expecting bigger returns.
Value stocks are essentially on sale: These are stocks investors have deemed to be underpriced and undervalued. The assumption is these stocks will increase in price, because they’re either currently flying under the radar or suffering from a short-term event.
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Types of stock classes
Companies might also divide their stock into classes, in most cases so that shareholder voting rights are differentiated. For example, if you own Class A of a certain stock, you might get more voting rights per share than owners of Class B of the same stock.
If a stock has been segmented into different classes, each class typically has its own ticker symbol. For example, 21st Century Fox shares are sold under FOXA (A shares) and FOX (B shares).
Choosing the right stocks for you
An important consideration when investing in stocks isn’t necessarily the stock’s category, but whether you believe in the company’s long-term growth potential and whether the stock complements the other investments you own.
But if the idea of assembling individual stocks into a diversified portfolio seems daunting — and it certainly can be — you might want to consider stock index funds.
Index funds are one of the easiest ways to build a diversified portfolio. These funds allow you to purchase many different types of stocks in a single transaction: They track a section of the market — such as large-cap stocks — by following a benchmark index, like the S&P 500. For more about index funds, read our full explainer.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.