Investing in the stock market has historically been one of the most significant ways to build wealth over the long-term. As you begin to research different stocks, you’ll inevitably come across concepts like “diversification” and “asset allocation,” both of which encourage you to spread your investment dollars across numerous industries and markets.
Part of learning how to diversify wisely is learning the different types of stocks, each of which comes with varying levels of risk and reward. Though on a basic level, stocks come in two types, common and preferred, on a much deeper level they can be separated into 21 different categories:
Types of stocks to invest in
|Common stock||IPO stocks|
|Preferred stock||Dividend stocks|
|Large-cap stocks||Non-dividend stocks|
|Mid-cap stocks||Income stocks|
|Small-cap stocks||Cyclical stocks|
|Micro-cap stocks||Non-cyclical stocks|
|Mega-cap stocks||Safe stocks|
|Domestic stocks||ESG stocks|
|International stocks||Blue chip stocks|
|Growth stocks||Penny stocks|
To help you get a firm grip on the stock market, let’s take a deeper dive into these different types of stocks.
1. Common stock
When you hear investors talking about stocks, they’re most likely talking about “common stock.” Common stock represents partial ownership in a company. As a common stockholder, you get certain voting privileges, as well as a claim on some of the company’s profits (if they pay out dividends).
With common stock, you have unlimited upside potential, as stock values theoretically have no ceilings. On the flip side, if a company goes bankrupt and liquidates, you risk losing your entire investment. Any money the company has will go to creditors, bondholders, and preferred stockholders first. Once those three groups are paid off, you might receive something for your shares, though, more often than not, your shares will become worthless.
But that’s only in the extreme example of bankruptcy and liquidation. More likely, the value of your common stocks will go up and down, following the company’s performance and assets, trends in the stock market, and investor demand.
Because the upside is unlimited, the value of common stocks have the potential to double or triple, sometimes doing so several times over long periods of time. For this reason, common stocks are better for investors who are looking for long-term growth, rather than generating income now.
2. Preferred stock
Preferred stock works differently than common stock. It doesn’t represent partial ownership in a company, meaning you don’t have voting rights, and the value of your preferred stock doesn’t appreciate as the company becomes more profitable and grows.
Rather, preferred stocks are a form of fixed-income security. They entitle shareholders to a set dividend payment, which the companies then pay out at regular intervals. Dividends on preferred stocks are usually higher than those on common stocks, and, in the event of a bankruptcy or a tough financial time, preferred stockholders will receive their payout before common stockholders. Hence the “preferred” in the title.
Preferred stocks are great for investors who want to generate income, not growth. The yield on a preferred stock could change overtime, usually in response to a change in the benchmark interest rate. Unlike common stocks, however, the value of your preferred stock won’t grow substantially over time.
3. Large-cap stocks
Large-cap stocks are companies with market capitalizations of $10 billion or more. Recall that market capitalization refers to the total value of a company’s stock. For instance, if a company has 30 million outstanding shares, with each one worth $100, then we’d say that company has a market cap of $30 billion (30 million x $100), and we would consider it a large-cap stock.
Large-cap stocks are typically leaders in their respective industries. They’re often companies with household names, and they typically pay out dividends, too. Because of their size, large-caps are considered safer investments, as it’s unlikely the company’s stock value will tank considerably. With added security, however, comes a limited upside, as many large-caps have reached a point where they won’t grow exponentially.
Popular large-caps include:
- Brookfield Asset Management (TSX:BAM.A)
- Enbridge Inc. (TSX:ENB)
- Fortis (TSX:FTS)
- Royal Bank of Canada (TSX:RY)
- Shopify (TSX:SHOP)
- Suncor (TSX:SU)
- Thomson Reuters Corporation (TSX: TRI)
4. Mid-cap stocks
Mid-cap stocks are companies with a market cap between $2 and $10 billion. Because they’re smaller than large-caps, mid-caps have more potential for growth. At the same time, they could be more risky, as they don’t have the same capital investment as large caps to fall back on.
Many mid-caps are growing companies that continue to push out exciting products and innovative research. Some, however, are former large-caps that have fallen back into the mid-cap range. Others, on the other hand, are leaders in their respective markets, but their markets are so small, they’re struggling to grow any bigger.
Popular mid-cap stocks include:
5. Small-cap stocks
Small-cap stocks are companies with a market capitalization between $300 million and $2 billion. Small-caps are often young startups with a potential for growth but less stability than mid-caps and large-caps.
Because of their size, small-caps are often more volatile than larger stocks. That’s not always a bad thing, as small-caps have the potential to explode in value. Of course, for every small-cap that becomes a success, there are hundreds that don’t. If a small-cap can’t lift off the ground, it could easily fail, making them more risky than large, more stable stocks.
On the flip side, several small-caps end up becoming the stocks investors wished they had invested in when they were small. For investors who have a longer investment horizon and want more upward growth, small-caps could become a lucrative opportunity.
6. Microcap stocks
Microcap stocks are even smaller than small-caps. By definition, a microcap stock is a company with a market capitalization between $50 and $300 million.
Like small caps, microcaps are typically young startups that haven’t caught the attention of the larger market. They’re usually in an aggressive growth stage, reinvesting their shareholder’s dollars in company expansion and research development. Because of their size, microcaps typically don’t trade on a stock exchange, like the TSA. Instead, you usually have to buy them “over-the-counter,” on the OTC Bulletin Board (OTCBB) or through pink sheets.
Because they don’t trade on a stock exchange, microcaps may have less liquidity than stocks with larger market caps. In other words, you might have more difficulty trading your microcaps than other types of stocks. Likewise, companies on pink sheets don’t always reveal information about their finances, as regulation is much looser than on a stock exchange. That, in addition to their small size, can make microcaps a risky investment.
Despite their risks, microcaps could bring you hefty gains. If you can find great microcap companies, you can get in the door before the company takes off.
7. Mega-cap stocks
Mega-caps are companies that have market capitalizations of $200 billion or higher. Like large-caps, megacaps offer more stability rather than immense growth potential. They can be great for investors who are nearing retirement, who don’t want to take on the risks of micro- to mid-cap stocks, or who want to stabilize a portfolio of more volatile investments.
Only a dozen or so companies have reached this exclusive status, only one of which resides in Canada (Shopify). For more examples of mega-stocks, you’ll have to look south of the border: Amazon, Apple, Coca-Cola, Johnson & Johnson, and Verizon are all American mega-caps you might be able to buy through your online broker.
8. Domestic stocks
Domestic stocks are Canadian companies that trade on our exchanges, such as the TSX. Domestic stocks are typically headquartered in Canada, and you’ll always see their share price in Canadian dollars. For beginning investors, domestic stocks are a good place to start, as you’re probably more familiar with Canadian companies than with international ones.
9. International stocks
International stocks, or foreign stocks, are stocks that trade on exchanges outside of Canada. International stocks are slightly more risky than domestic stocks, as they might require you to research and learn about foreign markets. That said, international stocks can help you achieve greater diversification, especially since Canada’s market is only about 3% to 4% of the total world market.
Some international stocks you might want to consider include:
- Jumia Technologies
10. Growth stocks
Growth stocks are companies that are expected to grow their revenues or profits at a faster-than-average pace. Growth stocks may have a savvy leadership, an explosive business model, or an innovation that looks to disrupt a larger market. Often they’re on the cusp of some larger trend, such as an advance in technology or a change in consumer behavior.
Because they’re often small to mid-sized companies with a sizable market opportunity, growth stocks offer investors an opportunity to earn big returns. Of course, growth stocks have their risks, too, including an overinflated share price that bursts when the company doesn’t deliver on its promises. But if you’re okay with large price fluctuations and more risk, growth stock investing could be for you.
Some popular growth stocks include:
11. Value stocks
Value stocks are companies that are trading for less than they’re truly worth. These companies could have had a bad quarterly report, or a temporary price cut due to a market correction. Either way, their share price is below their actual value, which makes them seem like a “discount” to perceptive investors.
Unlike growth stocks, which are usually new companies looking to grow, value stocks are typically larger, more-established companies that have slowed down. They have relatively stable revenues, steady growth rates, and they typically pay out dividends, too.
To find value stocks, investors often use valuation metrics, such P/E ratios and P/S ratios. This helps investors see if the underlying company has more intrinsic value than the share price suggests.
12. IPO stocks
Recall that an IPO, or “initial public offer,” is when a private company goes public and begins to sell shares to investors. An IPO stock, then, is simply an opportunity to get in on the ground floor and invest in a company whose stock shares are brand-new.
IPO stocks come in two types, those that are sold before the IPO happens and those that are sold after.
Those that are sold before the IPO happens are fairly exclusive. Often, your broker will need to have access to the stock, and if they don’t, you might be out of luck. If they do have access, you typically have to meet specific requirements, such as having a certain amount of money in your brokerage account or trading stocks a certain number of times per year.
If you can’t get a stock before the company’s IPO, you can always wait until the stock is available on an exchange. It might be better to wait, as you can see how the stock value holds up in the weeks and months after the IPO.
IPO stocks could present you with a lucrative opportunity to get in on the ground floor before a company explodes. But proceed with caution. Always evaluate the company before you buy its stock, and be wary of “investor hype,” as overzealous excitement can easily overinflate a company’s initial share price.
13. Dividend stocks
Dividend stocks are stocks that pay out a portion of the company’s profits to shareholders. These payouts are usually cash, but sometimes they can be distributed in the form of shares in the company’s stock. Dividends are paid out periodically—annually, semi-annually, quarterly, or monthly—and occasionally companies will increase their dividends.
Popular dividend stocks in Canada include:
- Canadian Utilities (TSX:CU)
- Enbridge (TSX:ENB)
- Fortis (TSX:FTS)
- Suncor Energy (TSX:SU)
- Telus (TSX:T)
- Toronto-Dominion Bank (TSX:TD)
14. Non-dividend stocks
A non-dividend stock is simply a stock that doesn’t pay a dividend. Many growth stocks and small-cap companies won’t pay out a dividend, as they typically reinvest profits and investor’s dollars into continued growth.
Even without the quarterly payout, however, non-dividend stocks can be a strong investment, as the capital appreciation on the stock can far outweigh a quarterly dividend. Even so, many companies that reach a large market capitalization end up paying out dividends to shareholders.
15. Income stocks
Income stocks are stocks that reliably pay out a dividend (income stocks are nearly synonymous with dividend stocks). While dividend stocks refer to all companies that pay out a dividend, income stocks are typically reserved for those companies that are well-established, mature, and regularly increase their dividends.
Investors who are in or near retirement will often buy income stocks to create a passive income strategy. Even if you’re not close to retirement, income stocks could be ideal for investors who want to generate cash now from their investments.
16. Cyclical stocks
When you look at the history of a national economy, you’ll see that every economy goes through periods of prosperity, as well as periods of economic slowdowns. Investors call this pattern “cyclicality.” When a stock is heavily affected by these cycles, it’s referred to as a cyclical stock.
Cyclical stocks tend to perform exceptionally well during economic booms, while also performing poorly during challenging times. For instance, companies within the discretionary sector, such as airlines, hotels, retail stores, restaurants, car manufacturers, and tech companies, typically sell less products and services when money is tight. When times are good, however, these companies tend to perform very well, as people have more money to spend.
Though economic cycles can have a major impact on cyclical stocks, it’s often hard to predict just which companies will perform poorly and which won’t. For instance, the pandemic-induced recession caused bank and manufacturing stocks to decline, though because people started working from home, tech stocks performed fairly well. For that reason, it’s good to diversify your cyclical stocks, spreading your money around different industries.
17. Non-cyclical stocks
Not every company is susceptible to economic cycles. Some, in fact, are relatively immune to them. We call these “non-cyclical stocks,” or defense stocks, as they tend to perform similarly during both periods of prosperity and recessions.
Examples of non-cyclical stocks include those in non-discretionary retail, such as grocery stores, drugstores, and wholesale retailers, as well as utility stocks and real estate.
18. Safe stocks
While no stock is 100% safe from market volatility, some stocks are safer than others. We call these stocks “safe stocks.”
Safe stocks are companies that grow their revenues year after year. They’re often relatively immune to economic cycles, and they have durable competitive advantages that all but concretize their status as an industry leader. Because of their size and prestige, they typically have power over their rivals, and often their products and services continue to sell even in recessions.
Of course, no stock is completely immune to volatility, and safe stocks can lose value during market corrections or recessions. That said, their price movements are typically less jumpy when compared to other types of stocks, such as microcaps, small-caps, and growth stocks.
19. ESG stocks
ESG investing is an ethical approach to investing in which you measure a company’s impact on their environment, community, shareholders, and— broadly speaking—the world, alongside their financial returns.
ESG stands for “environmental, social, and governance.” The “environmental” aspect relates to the company’s carbon footprint, as well as other green principles, such as water conservation, recycling, and proper waste disposal. The “social” aspect relates to how the company treats employees, shareholders, consumers, suppliers, and other members of the local community. And the “governance” aspect looks at the company’s leadership and business ethics.
ESG investors analyze corporate sustainability reports along with third-party ratings to decide a company’s ESG ranking. Some research suggests that companies with strong ESG principles have lower downside risk and stronger returns than non-ESG counterparts.
20. Blue chip stocks
Blue chip stocks are industry-leading companies with a long tract record of success and a dependable business model. These companies have typically grown so large, they’ve become household names, and there’s little doubt in consumers’ minds that the company will go on operating.
Like large-caps, blue chips are very stable, with little or no prospect of explosive growth. Unlike large-caps, however, which are defined by their market capitalization, blue-chips aren’t defined by any quantifiable metrics. Instead, they’re defined by more subjective characteristics, such as reputation, brand recognition, and popularity.
Because of their size, blue-chips are a fairly safe investment. Many have a history of paying out dividends, too, with those dividends increasing regularly. That said, because blue-chip stocks have reached a place of stability, they don’t offer as much growth potential as small- and mid-caps.
Some common blue-chip stocks in Canada include:
- Shopify (TSX:SHOP)
- Royal Bank of Canada (TSX:RY)
- Canadian National Railway (TSX:CNR)
- Canadian Tire (TSX:CTC.A)
- Fortis (TSX:FTS)
- Enbridge (TSX:CSU)
- Suncor Energy (TSX:SU)
21. Penny stocks
Penny stocks are small companies whose stocks trade for $5 or less per share. Like microcaps and small-caps, penny stock companies are usually small start-ups with no track history of success. Unlike microcaps and small-caps, however, penny stocks typically don’t have a long-term prospect for growth. They’re priced cheap, and, in this case, their price reflects the company.
If their companies are so bad, why do people invest in penny stocks? Most of the time, penny stock investors aren’t looking for long-term growth. They buy large quantities of penny stocks, hoping that the share prices increase even by a few cents. If they do, these investors can earn some quick gains, as long as they sell the stocks in time.
For any investor, not just beginners, penny stocks are an extremely risky venture. Be sure you understand their risks before you start trading them. Even so, the other 20 types of stocks listed above will most likely offer you a better opportunity for your investment dollars.