Different types of stocks and stock classifications are suitable for different types of investors. While stocks like Facebook and Amazon, which are categorized as common stocks, grab headlines on financial news networks, other types of stocks called preferred stocks may be a better bet for more risk-averse investors.
Depending on your appetite for risk, different stock classifications may be better suited to your financial goals. Growth stocks, blue chip stocks, defensive stocks, speculative stocks, income stocks, and value stocks are among the various stock classifications from which you can choose.
So how do you decide between common stock vs preferred stock and which stock classifications are best suited to your financial aims?
Common Stock vs Preferred Stock
Common stock and preferred stock are among the different types of stocks that give shareholders partial ownership in companies.
While these two types of stocks are similar in many ways, they differ with respect to ownership rights.
Most stocks that ordinary investors come across are common stocks, which entitle shareholders to a share of the company’s profits through any dividends paid as well as any capital appreciation.
When you buy shares of companies like Twitter, AutoZone, and Netflix, you are given voting rights.
The number of shares you own directly relates to the number of votes you receive.
You can cast these votes to elect members of the board who in turn can decide to pay dividends to shareholders.
As a common stock owner, you also receive pre-emptive rights to maintain the same percentage ownership share over time. For example, you can buy more stock to maintain your proportion of ownership if the company chooses to issue more stock via a secondary offering.
The most important thing to note when you own common stock is that your gains and losses are heavily tied to share price movements. If a company pays no dividends then your fortune will be tied exclusively to the whims of its share price.
Because the ups and downs of a company’s share price can significantly affect your wealth, and the fact that you have no control over whether a company pays a dividend, you should carefully monitor your risk tolerance and capacity for risk before investing in common stock.
On the risk totem pole, owners of common stocks take on the most risk. If a company enters bankruptcy, bondholders and preferred stockholders get paid first.
To lower the risk of any single company hurting your portfolio in a big way, consider diversifying your portfolio. Robo-advisors like Betterment and Personal Capital do this automatically for you. Or you can buy ETFs from major brokers like thinkorswim or tastyworks.
As an aside, if you trade outside the United States, such as in the UK or Commonwealth regions, common stock may be better known as Equity Shares or Ordinary Shares.
Preferred stock is considered to be a bit safer than common stock but the upside is generally lower.
Unlike common stockholders, preferred stockholders don’t usually receive voting rights but they do have a greater claim to a company’s assets.
Preferred stockholders usually receive higher dividend payments compared to common stockholders and get paid sooner.
Plus, the dividends paid to preferred stockholders tend to be more predictable. Unlike common stockholders, whose dividends may vary depending on policy changes made by a board of directors, preferred stockholders usually receive a regular dividend that is fixed for a specific time period.
Some investors like preferred stock because of this predictability in income while others shun it because shares are often callable, meaning the company can buy back shares from shareholders at any time specified.
If you are willing to take on more risk, common stock usually has greater upside while preferred stock is usually more suitable for more risk-averse investors who prioritize income predictability.
What Are The Different Types Of Stock Classifications?
When you buy stocks, you can choose from different types of stock classifications, including:
- Value stocks
- Income stocks
- Defensive stocks
- Growth stocks
- Penny stocks
- Blue-chip stocks
- Value Stocks
Perhaps the most famous value investor of all time is Warren Buffett. He shares investing lessons each year in his annual Berkshire Hathaway shareholder letter that are well worth checking out if you are keen to invest patiently over the long-term.
If you want to follow in the footsteps of successful value investors and find out how Warren Buffett got so rich, you will need to understand the difference between when stocks are cheap and when they are undervalued.
The key metric that successful value investors focus on is intrinsic value, which tells you what a company is really worth.
When a company’s intrinsic value is higher than its share price, the stock may be undervalued and vice versa when the intrinsic value is below the share price, the stock may be overvalued.
Intrinsic value is sometimes called fair value. For Amazon stock, you can view the fair value below: