The barriers to stock market investing have slowly crumbled over the last few decades. Mom-and-pop investors can now own large swathes of the markets through mutual funds and exchange-traded funds (ETFs) while paying low fees and (most likely) zero commissions. You don’t even need to worry about rebalancing if you’re in a target-date fund—they automatically adjust your market exposure as you get closer to your target retirement date.

Of course, not everyone is satisfied with a “set it and forget it” style. If you want to learn more about the plumbing inside of your index and mutual funds, you’ll need to have a solid understanding of different types of stocks. Shares of Amazon and shares of Exxon aren’t going to react the same way to different news and economic conditions. Nor can you buy shares of General Electric and Netflix and expect an equal return. Here are a few basics on the securities that actually compose the stock market.

If you need assistance with your portfolio, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

Common vs Preferred

Not all shares are created equal, even inside the same company. Common stock is what most investors are buying when they purchase shares on the open market. Preferred shares are more like bonds—they pay a steady dividend and the share price tends not to fluctuate as much as common shares. Common shares can be further broken down by class (A shares, C shares, etc.) in regards to voting rights. Preferred shareholders have no voting rights, but they do get compensated before common shareholders in the event of a bankruptcy.

Growth vs Value

Growth stocks vs value stocks is one of the premier rivalries in the stock market. Seriously, if you look at the advocates of each side on social media, you’d think it was Steelers vs Ravens. Growth stocks are high-flying companies focused on research and development (R&D) and expansion. They return very little profits to shareholders and instead plow much of their cash back into growing the firm. Stock price appreciation is the main goal of investing in these companies since very little dividend income will be distributed.

Value stocks tend to be older, more established companies that have perhaps fallen out of favor in the short-term. A stock doesn’t necessarily need to be undervalued to be considered a value stock. Companies in this category aren’t necessarily concerned with growing the firm as fast as possible. Value stocks tend to be less volatile than growth stocks and return profits to shareholders via dividends.

Stocks By Sector

Stocks are also placed into sectors based on their industry or area of business. Some sectors are more associated with growth (tech), others with value (utilities), and some bridge the gap between both (e.g., healthcare, communication services). Explore some of the primary sectors:

Technology. Companies in this sector are focused on different areas of the tech field, such as computers, AI, online commerce, and payment processors.

Financials. The finance sector contains some of the oldest firms in the country like banks and asset managers. Newer entrants in the sector include the field of fintech.

Healthcare. Insurance providers, hospitals, drug manufacturers, drugstores, and medical equipment producers make up a bulk of this sector. Some areas like insurance and hospitals are less volatile than others like drug-makers.

Utilities. The utility sector is made up of the firms that supply power and services to homes and businesses across the grid. These companies are heavily regulated and utilities are often considered the least volatile group of stocks.

Consumer Staples. Staples are the critical items consumers need to purchase regularly, such as cleaning supplies, food, beverages, toiletries, and even tobacco. Consumer staples tend to have flat demand and sales don’t fluctuate depending on the economy or consumer sentiment.

Consumer Discretionary. If consumer staples are the essentials, consumer discretionary makes up the non-essentials like electronics, apparel, travel, leisure, cars, and appliances. Consumer discretionary stocks tend to do well when the economy is booming and disposable income is high.

Industrials. The industrials are the backbone of commerce, providing the necessary tools and equipment needed for construction, engineering, machinery, and aerospace. Companies in this sector sell to companies in other sectors, not end-users or consumers.

Stocks By Market Cap

Stocks can also be divided up based on their market capitalization, or the total outstanding value of their combined shares. Splitting stocks by market cap usually separates new companies from established firms. Here are the four categories of market capitalization:

Micro-cap. Stocks with market caps under $300 million are considered micro-caps. These are often extremely volatile penny stocks which may not be suitable for all investors.

Small-cap. With market caps between $300 million and $2 billion, the small-caps are the small and midsize businesses that make up large portions of the economy. These companies have potential for high growth, but also have a high rate of failure.

Mid-cap. Stocks in the mid-cap sector have market capitalizations between $2 billion and $10 billion. Mid-cap stocks are appealing because they’re less volatile than small-caps but still have room to grow.

Large-cap. Stocks with market caps over $10 billion are considered large-caps. These are the biggest and most visible firms in the world, often with decades of experience and track records of success. Large-cap stocks might not have the growth rate of small- or mid-cap stocks, but they’re more reliable, more likely to pay dividends, and still provide plenty of stock price appreciation.

How you allocate your assets to the various classes of stocks depends on your risk tolerance and investment goals. If you have a long time horizon, a portfolio of aggressive growth stocks or small-cap companies could make sense. If you have a shorter time horizon, large-cap companies or value stocks will probably be preferable. Picking stocks can be fun if you’re using money you can play around with, but always consult your advisor before making large scale portfolio changes.

Work With an Experienced Financial Advisor

If you need further assistance understanding different types of stocks or would like to discuss your portfolio, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.

Disclosure

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Growth investments may be more volatile than other investments because they are more sensitive to investor perceptions of the issuing company’s growth of earnings potential.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. As interest rates rise, the price of the preferred falls (and vice versa). They may be subject to call feature with changing interest rates or credit ratings.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.

The principal value of a target fund is not guaranteed at any time, including at the target date.

Because of their narrow focus, investments concentrated in certain sectors or industries will be subject to greater volatility and specific risks compared with investing more broadly across many sectors, industries, and companies.