This article explains the various forms of shares available in the stock markets today.
Stock markets are more complex than you might originally imagine and are made up of a wide range of stocks that extend beyond the publicly traded stocks that are traded on any given exchange. As an investor, it is important to understand the different types of stocks present and available in the market and to understand the characteristics that make them unique. This information can help you determine whether or not they would be a viable investment. Below are some of the different types of actions that are meant to clear up any confusion you may have about them.
Common and preferred shares
Also known as common stock, owning common stock is like partial ownership of a particular company. With this class of shares, it is possible for investors to benefit from profits generated by the company in the form of dividends paid by the company. Common shareholders are responsible for electing a company’s board of directors and have the right to vote on policies that affect the operation of the company. The liquidation events carried out by these companies entitle the holders of this class of shares to the assets of the company; however, this is only applicable once payments have been made to preferred shareholders, as well as other debt holders. Beneficiaries of common stock generally include company founders as well as employees.
On the other hand, the preferred stock provides shareholders with dividend payments that are made regularly and are paid before the dividends are distributed to common shareholders. In the event of a company dissolution or bankruptcy, preferred shareholders are the first type of shareholders to be reimbursed. This type of stock is more suitable for investors hoping to secure a passive income stream. No voting rights are granted to the holders of these shares.
Various companies such as Alphabet Inc. issue common and preferred stock. GOOGL is its Class A Common Stock, while GOOG is its Class C Preferred Stock.
These stocks generate regular income because they distribute a company’s excess cash or earnings and issue dividends above the market average. These stocks generally experience less volatility and do not have the type of capital appreciation that growth stocks experience. However, this very fact makes them ideal for investors who have a low-risk threshold and are looking for a steady stream of income.
Stocks of well-established companies that have a large market capitalization are called blue-chip stocks. These companies often have a long history of creating reliable profits and are likely to be leaders in the industry or sector in which they operate. In times of uncertainty, it is not uncommon for conservative investors to overweight their portfolios with these types of stocks. Examples of blue-chip stocks include, but are not limited to, Microsoft Corporation (MSFT) and McDonald’s Corporation (MCD).
Cyclical and non-cyclical stocks
Cyclical stocks refer to those that are directly affected by the performance of the economy and generally follow business cycles of boom, peak, bust, and recovery. These stocks are generally characterized by significant volatility and outperform other stocks during periods of economic strength and when consumers have higher disposable incomes.
Non-cyclical stocks, on the other hand, operate within “recession-proof” industries that are likely to do fairly well regardless of the state of the economy. These stocks tend to outperform their cyclical counterparts during an economic recession or downturn, as demand for essential goods and services is likely to remain constant.
These stocks are known to provide consistent returns in most market environments and economic conditions. Companies that issue such shares typically sell essential goods and services, including utilities, health care, and consumer staples. By investing in such stocks, investors’ portfolios can potentially be protected against significant losses in the event of a bear market. Defensive stocks can also fall into the category of blue-chip, value, non-cyclical or income stocks.