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Stock Classifications Explained

Did you know there are different ways stocks can be classified? When creating your investment strategy, it may be helpful to know about different types of stocks as it will further assist in diversifying your portfolio, often allowing you to earn the most from your investments. It’s also important to note that a single stock can fall into more than one category, and there are several parameters that can be used to organize stocks and investments.

Ownership

There are two main types of ownership when it comes to stocks: common and preferred. When you invest in common stocks, you’re essentially purchasing a small piece of the company. Within that ownership, you earn voting rights on decisions being made within the company. Common stocks carry a higher level of risk and offer a higher level of reward. Common stocks are best suited for investors with a high risk tolerance — people who are comfortable with market volatility and who are looking to have a say in a company's decisions through voting rights.

On the other hand, there are preferred stocks, which do not offer investors voting rights. Instead, they offer fixed dividends which provide steady income streams. They also tend to offer more stable prices, making them a little less risky with more of a stable return. Preferred stocks are best suited for investors seeking consistent income with a relatively lower risk.

Market Capitalization

Market capitalization, often shortened to market cap, represents the total value of a company’s worth, which helps identify risk factors. A company’s market cap is the total dollar value of all outstanding shares, calculated by multiplying the number of outstanding shares by the price per share. Some examples of market caps include:

• Large market cap: Stocks with a market cap of $10 billion or more.
• Mid market cap: Stocks with a market cap between $2 billion and $10 billion.
• Small market cap: Stocks with a market cap below $2 billion.

Market Sector

The market sector relates to the classification of a company based on the industry their products and services fall into. Companies in the same market sector share many characteristics with one another, and as a result could face similar economic trends. For example, the health care sector includes companies like pharmaceuticals, medical devices, and even hospital and health care services. Market sectors can help construct investment portfolios that align with a person’s specific goals or areas of interest and offer opportunities for investment portfolio diversification. Some other common market sectors include the following:

• Technology: Communication devices, IT services, hardware and software.
• Financial: Banking and insurance.
• Utilities: Electric, water and natural gas.
• Industrial: Airlines, machinery and construction.

It’s important to remember that stocks can be organized into a variety of categories including kinds of ownership, market size and company’s industry. Try considering whether any of these investments could fit into your current plan and risk-tolerance level to assist in helping you reach your future financial goals!

Sources:

https://www.ameriprise.com/financial-goals-priorities/investing/types-of-stocks#six

https://www.investopedia.com/terms/s/stock.asp

https://groww.in/blog/how-are-different-stocks-categorized