A Guide to Understanding Different Types of Stocks

Are you a parent eager to teach your children about the world of investing? 

Navigating the world of investment can often feel like trying to understand a foreign language for most parents, especially when planning for their child's future. With a vast sea of options available, distinguishing between different types of stocks can be daunting. 

However, understanding the ins and outs will enable you to build a robust financial portfolio that can support your family's dreams - and secure your child's future. 

Here, we break down the different types of stocks in our most user-friendly guide yet.

What Are Stocks?

Investing in stocks isn't just about buying and selling - it's a nuanced art form that, in essence, allows you to own part of a business.

So what is a stock, exactly? At its core, a stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

When you buy stocks, it means you own a part of a company, whether it's a tiny fraction or a substantial stake. Imagine a pizza being sliced into pieces; each piece is akin to a share of a company.

Companies distribute a part of their earnings as dividends to the shareholders. If the company does well, the value of your stock increases, and you can even sell it for a profit.

14 Different Types of Stocks to Know About

Investing in the stock market isn't just about making a quick buck; it's about creating a portfolio that reflects your values, goals, and understanding of the financial landscape. 

Among the many options that you, as an investor, have at your disposal, understanding the basics, such as the types of stocks available, becomes incredibly important. Here are some common types of stocks.

1. Common Stock

The most widely recognized type of stock is common stock. Holders of common stock exercise control by voting in shareholder meetings and are eligible to receive dividends. 

In the event of liquidation, common stockholders are the last to receive assets, after all debt and preferred stock are paid. 

Iconic companies like Apple and Microsoft offer common stock, allowing investors to partake in their storied journeys of innovation and growth.

2. Preferred Stock

Preferred stock usually doesn't come with voting rights, but it entitles owners to a fixed dividend. This stock is typically less volatile than common stock and has a prior claim on earnings and assets in the case of liquidation.

Companies like Bank of America and utilities firms often issue preferred shares to attract conservative investors.

3. Large-, Mid-, and Small-Cap Stocks

Market capitalization is one way to categorize stocks. 

Large-cap stocks have a market capitalization of over $10 billion. Mid-cap stocks typically range between $2 to $10 billion, and small-cap stocks are those below $2 billion. Understanding market cap helps investors assess the size, risk, and growth potential of a stock.

4. Sector Stocks

Stocks are often categorized by the industry or sector in which the company operates, such as technology, healthcare, consumer staples, and more. Sector stocks allow for easier comparison and benchmarking within an industry.

5. Domestic and International Stocks

Domestic stocks are from companies based in the investor's home country, while international stocks come from companies located outside the investor's country. Diversifying between domestic and international markets can help spread risk.

6. Growth Stocks

Growth stocks are of companies considered to have a significant potential for growth in sales and earnings. Typically, these companies invest their profits back into the business and rarely pay dividends.

7. Value Stocks

Value stocks have shares that appear to trade at a lower price relative to their fundamentals, such as dividends, earnings, or sales. They tend to be well-established companies that pay dividends.

8. Income Stocks

Income stocks make consistent payouts, allowing investors to generate a steady stream of income. These are commonly large, stable companies with less potential for significant capital appreciation.

9. Blue-Chip Stocks

Blue-chip stocks are stocks of well-established, financially-sound, and highly-respected companies that have been around for many years. They typically have a history of stable earnings and/or dividend payments.

10. Cyclical and Non-Cyclical Stocks

Cyclical stocks are those whose prices are affected by macroeconomic situations and market cycles. Non-cyclical stocks, on the other hand, are considered to be less sensitive to the economy.

11. Defensive Stocks

Defensive stocks are those that provide a constant dividend and stable earnings regardless of the state of the overall stock market. They are a solid choice during an economic downturn.

12. IPO Stocks

IPO (Initial Public Offering) stocks are those of companies that offer their stock to the public for the first time. They are often associated with high risk and high reward.

13. Penny Stocks

Penny stocks are those that trade at a very low price, generally under $5, and are usually offered by companies with a small market capitalization. They are considered high-risk investments due to their speculative nature.

14. ESG Stocks

ESG stands for Environmental, Social, and Governance, and ESG stocks are those that consider these factors alongside financial metrics to evaluate performance. They are often chosen for ethical reasons.

Why EarlyBird is the Best Investment for Your Growing Family

Investing in stocks offers a hands-on lesson in economics, business, and decision-making. By walking through the various types of stocks with your children, you lay the groundwork for their future financial stability, literacy, and success.

Putting money aside for your child's future, whether it's in stocks or some other investment, is a smart move. However, figuring out where and how to invest your money can be tricky, especially if you want other families to be able to contribute as well.

EarlyBird is an app that solves these dilemmas. It's an app that allows you to set up an UGMA (Uniform Gift to Minors Act) account with a fully-managed portfolio for yoru child. With a portfolio of EFTs, your investments will be distributed across asset classes and industries - which translates to less risk and ideally, better long-term performance.

The best part is that EarlyBird makes it easier for you to bring your child or children right along with this journey with you. You can show them how to invest a portion of their earnings, how to research companies, and how to make informed decisions. Stock investing sets the stage for a lifetime of learning and empowerment.

Don't shy away from these important conversations – when it comes to your child's financial future, knowledge is power. And the best part? You'll be learning right alongside them.