Наталья Серова

Types of stocks you can invest in

Investing in the stock market has historically been one of the most important paths to financial success. As you dive into stock research, you will often hear how stocks are discussed with reference to different categories of stocks and different classifications. Here are the main types of stocks you should know.

  • Common Stocks
  • Preferred Shares
  • Large Cap Stocks
  • Mid-cap stocks
  • Small Cap Stocks
  • Internal promotions
  • International promotions
  • Growth Stocks
  • Value Promotions
  • IPO Shares
  • Dividend Stocks
  • Non-dividend promotions
  • Cyclical promotions
  • Non-cyclical promotions
  • Protective promotions
  • ESG Promotions
  • Blue Chip Promotions
  • Garbage shares

Common and Preferred Shares

Most of the stocks people invest in are common stocks. Ordinary shares are partial ownership of a company, with shareholders entitled to a pro rata share of the value of any remaining assets in the event of a liquidation of the company. Common stock gives shareholders theoretically unlimited upside potential, but they also risk losing everything if the company crashes with no assets left.

Preferred shares work differently as they give shareholders an advantage over ordinary shareholders in order to get back a certain amount of money in the event of a liquidation of the company. Preferred shareholders are also entitled to receive dividends before ordinary shareholders.

Large, Mid and Small Cap Stocks

Shares are also classified by the total value of all their shares, which is called market capitalization. Companies with the largest market cap are called large cap stocks, while mid and small cap stocks represent successively smaller companies.

There is no clear border separating these categories from each other. However, one commonly used rule is that stocks with a market cap of $ 10 billion or more are treated as large-cap stocks, while stocks with a market cap of $ 2 billion to $ 10 billion qualify as mid-cap stocks, and stocks with market caps below $ 2 billion get treated as small cap stocks.

Large cap stocks are generally considered safer and more conservative as an investment, while mid and small cap stocks have more room for future growth but are more risky. However, just because two companies fall into the same category does not mean they have something in common.

Domestic promotions and international promotions

You can classify shares by their location. To distinguish Russian domestic stocks from international stocks, you need to look at the company's ISIN.

All securities have an international identification number (ISIN), where the first 2 characters encrypt the name of the issuer country. A list with ISIN codes can be found on the Moscow Exchange website.

ISIN code of Russian financial instruments begins with the letters RU, everything else is foreign financial instruments.

Growth Stocks and Value Stocks

Another categorization method distinguishes between two popular investment methods. Investors in growth stocks typically look for companies whose sales and profits are growing rapidly. Investors working with value stocks are looking for companies whose stocks are inexpensive compared to their peers or compared to their past share price, i.e. undervalued stock.

Growth stocks generally carry a higher level of risk, but the potential return can be extremely attractive. Successfully growing stocks have businesses that enjoy a steady and growing demand among customers, especially due to long-term trends in society that support the use of their products and services. However, competition can be fierce, and if competitors undermine the business of a growing stock, it can quickly lose popularity. Sometimes, even a simple slowdown in growth is enough for prices to plummet, as investors fear long-term upside potential is weakening.

Valuation stocks are usually greatly undervalued by the market, investors do not expect them to actively increase in value, have low P / E, P / B, P / FCF and others.

IPO Shares

Ipo stocks are stocks of companies that have recently gone public through an initial public offering. An IPO is often of great interest to investors looking to gain access to a promising business concept. But they can also be volatile, especially when there is disagreement in the investment community over their growth and profit prospects. Shares usually retain their IPO status for at least one year and for two to four years after they go public.

Dividend Stocks and Non-dividend Stocks

Many stocks regularly pay dividends to their shareholders. Dividends provide valuable income for investors and therefore dividend stocks are in high demand in certain investment circles. Technically, paying even $ 0.01 per share qualifies the company as a dividend share.

However, companies are not required to pay dividends on shares. Non-dividend stocks can still be a strong investment if their price rises over time. Some of the largest companies in the world do not pay dividends, although there has been a trend in recent years for more and more shares to pay dividends to their shareholders.

Cyclical stocks and non-cyclical stocks

National economies tend to follow cycles of boom and bust, with periods of prosperity and bust. Some businesses are more affected by broad business cycles, which is why investors refer to them as cyclical stocks.

Cyclical stocks include companies in industries such as manufacturing, travel, and luxury goods, as a downturn can make it impossible for customers to make large purchases quickly. However, when the economy is strong, a surge in demand could force these companies to recover sharply.

In contrast, non-cyclical stocks, also known as defensive stocks, do not have such large fluctuations in demand. An example is grocery chains, because no matter how good or bad the economy is, people still need to buy groceries. Non-cyclical stocks tend to perform better during market downturns, while cyclical stocks often win during strong bull markets.

Protective Promotions

Protective stocks are stocks whose stock prices move relatively small up and down compared to the general stock market. Defensive stocks, also known as low volatility stocks, typically operate in industries that are not as sensitive to changing economic conditions. They also pay dividends often, and this income can offset the fall in stock prices during difficult times

ESG investing

ESG investing refers to an investment philosophy that focuses on environmental, social and corporate issues. Rather than focusing entirely on whether a company generates profit and increases its revenue over time, ESG principles take into account other spillovers to the environment, company employees, customers and shareholder rights.

Responsible investing is associated with ESG regulations. Investors using socially responsible investing are weeding out stocks in companies that don't align with their most important values.

Blue Chip Stocks

Finally, there are categories of stocks that make judgments based on perceived quality. Blue chip stocks tend to be the best in the business world, featuring companies that are leading their industries and have a solid reputation. They generally do not provide the absolute maximum return, but their stability makes them a favorite with investors with less risk tolerance.

In contrast, junk stocks are low quality companies whose stock prices are extremely low, usually less than $ 1 per share. With dangerously speculative business models, junk stocks are prone to schemes that can drain your entire investment. It's important to be aware of the dangers of cheap stocks.