What Are the 4 Types of Stocks?

Andrew Denney

April 12, 2023

There are many different stocks out there, and they all offer different benefits and risks. Understanding how the different types of stocks fit into your portfolio can help you choose the right ones for your needs.

There are four basic types of stocks: Common Stock, Preferred Stock, Cyclical Stocks and Value Stocks. Each one offers a unique advantage to investors, so knowing about them can make it easier to find the right investment for you.

Common Stock

Common stocks are the most common type of stock investors buy. They grant shareholders ownership rights, allow them to vote on big company decisions, and can increase in value when a company grows.

Companies issue common stocks to raise funds for expansions and other business expenses. They also use these securities to pay dividends to their shareholders.

They’re a popular investment option because of their higher growth potential, but they have downside risks as well. For example, the price of common stock can fluctuate wildly in the short term.

Likewise, if a company is in trouble and goes into liquidation, the common shareholders will be paid last. This means that you’ll lose more money than if you’d invested in bonds or preferred stock.

Preferred Stock

Preferred stock is a type of fixed-income security that pays dividends and has the potential to increase in value due to future earnings and dividend growth from the company. It also offers a lower risk of losses than common stock and may have tax advantages to investors who are eligible for the preferred dividend tax deduction.

Preferred stocks are issued by private or pre-public companies in order to raise capital. They tend to be less liquid than common shares and are typically purchased by institutional investors, who can deduct most of the dividends from taxes.

Aside from these benefits, there are some downside risks to owning preferred stocks. These include credit risk, call risk, extension risk, liquidity risk and the risk that tax changes may negatively impact the status of dividend income.

Cyclical Stocks

Cyclical stocks are those that move with the economy and tend to expand when the economy is expanding and decline when it’s contracting. Some examples of cyclical stocks are car manufacturers, airlines, furniture retailers, and hotels.

While cyclical stocks are typically considered riskier than more stable defensive stocks, they may still be worth owning. They provide a chance for significant gains and profit, but you must be careful to time them correctly.

They are also subject to large losses when the economy goes into recession. That’s why cyclical stocks should only be included in tactical asset allocations.

Defensive stocks, on the other hand, are companies whose business activity does not depend much on the state of the economy. Companies like food and beverage companies, health care, and real estate investment trusts are often considered non-cyclical or recession-resistant stocks.

Value Stocks

Value stocks are shares of companies that trade at a lower price than their fundamentals suggest. They typically have high dividend yields and low P/B and P/E ratios.

They’re a type of investment that can produce very good returns for a long period. However, they are also quite risky and can go down in price if their plans for growth don’t play out.

Value stocks are a great way to diversify your portfolio and earn good returns. They’re also an excellent choice if you want to get into international stocks.