What Types of Stocks Are There in the Stock Market?

There are different stock types, each with unique characteristics that affect their market behaviour as well as potential risk and returns. From common and preferred stocks to growth, value, and dividend stocks, understanding these categories may assist in market analysis. This article answers the question, “What are the different types of stocks?”, exploring their key differences and explaining how each type fits into the broader market.

The 4 Types of Stocks: Common vs Preferred and Growth vs Value

Stocks perform differently depending on market conditions, economic cycles, and company fundamentals. Understanding the differences may help traders assess risk, diversify portfolios, and align positions with their financial goals.

In terms of general stock classifications, there are 2 types of stock: common and preferred. However, investors also distinguish between 2 additional types of stocks, growth and value.

Common Stocks

Common stocks are the most frequently traded shares, giving holders partial company ownership and voting rights. Investors vote on key decisions like board elections and mergers, though individual influence is usually minimal unless they own a large stake.

Common stock dividends aren't guaranteed. Companies often reinvest potential returns, if they occur, instead—Tesla, for example, prioritises expansion over paying shareholders. However, according to statistics, common stocks historically offer higher potential long-term returns, with the S&P 500 averaging about 10% annually.

Common stocks are prone to volatility, experiencing significant price swings during economic uncertainty or market downturns. During the 2022 market downturn, even established companies like Microsoft and Meta saw sharp declines.

Preferred Stocks

Preferred stocks function as a hybrid between stocks and bonds, offering fixed dividends but typically without voting rights. They appeal to traders seeking potential income rather than capital appreciation.

One key distinction is that preferred stockholders have priority over common shareholders for dividend payments. If a company struggles financially, preferred dividends are paid before common stock dividends—though after bondholders. For example, during the 2008 financial crisis, Citigroup still paid preferred dividends ahead of common shareholders, though some were temporarily suspended.

Preferred shares generally have fixed dividend rates, like Bank of America’s preferred shares, offering steady payouts even when markets fluctuate. However, their lower growth potential limits potential long-term gains compared to their common counterparts. Additionally, many are callable, meaning companies can redeem them at a set price after a certain date, potentially capping returns.

Growth Stocks

Growth stocks belong to companies expanding faster than the broader market, typically by reinvesting potential returns instead of paying dividends. They are often found in tech, biotech, and emerging industries.

A standout characteristic of growth stocks is their high valuation metrics, particularly elevated price-to-earnings (P/E) ratios. For instance, NVIDIA, known for its dominance in AI-driven hardware, had a P/E ratio that rose to 147 in 2023 (source: Macrotrends). Despite falling to around 55 in 2024, it remained significantly higher than the S&P 500’s average of around 28 in the same period. Such high ratios reflect traders’ expectations for continued rapid expansion.

However, growth stocks are more volatile than value or defensive stocks. Netflix surged in early 2023 but previously saw sharp declines when subscriber numbers disappointed. Traders focus on revenue growth, market share, and innovation rather than potential immediate returns when evaluating potential growth opportunities.

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Value Stocks

Value stocks trade at prices below what their fundamentals suggest, often because they are overlooked by the market. Traders often look at P/E ratios to identify value stocks. JPMorgan Chase, for instance, typically trades at a lower P/E ratio than tech stocks but remains one of the largest banks.

Value stocks are often found in industries with strong demand, like utilities, consumer goods, and healthcare. Coca-Cola and Procter & Gamble are classic examples—companies that may generate reliable revenue even during economic downturns. Their returns may take longer to materialise, but many traders consider them a notable part of a well-balanced portfolio.

Other Types of Stock

Beyond these 4 main stock types, there are other different classifications of stocks that investors usually focus on: dividend, blue-chip, defensive, and cyclical stocks.

Dividend Stocks

Dividend stocks regularly distribute potential returns to shareholders. Unlike preferred stocks, which have fixed dividends, these payments vary based on company performance. Many dividend-paying companies, such as Johnson & Johnson and AT&T, have increased payouts annually for decades.

These stocks appeal to traders seeking potential long-term income rather than rapid growth. Dividend yields—the annual dividend payment as a percentage of the stock's price—are a key metric traders consider.

While dividend stocks often come from industries with strong demand like healthcare, telecommunications, or energy, they're not risk-free. Changes in interest rates can impact dividend stock prices because rising rates may reduce their appeal compared to bonds. Additionally, dividends aren't guaranteed and can be cut during financial difficulties.

Blue-Chip Stocks

Blue-chip stocks are shares of large, financially stable companies with a long history of strong performance. These companies are industry leaders, often with billions in revenue and a reputation for steady returns over time. Traders looking for companies with consistent earnings and established market positions often focus on blue chips.

Companies such as Apple, Microsoft, and Johnson & Johnson are widely recognised blue chips. Many also pay dividends, appealing to traders seeking both growth and steady income.

While blue-chip stocks tend to be less volatile than smaller companies, they aren't immune to market downturns. However, their strong balance sheets and reliable customer bases mean they often recover faster than riskier stocks. Market participants view blue chips as a notable component of diversified portfolios, often associated with potential stability.

Defensive Stocks

Defensive stocks belong to industries with steady demand, meaning they tend to hold their value even in economic downturns. Sectors here typically include healthcare, consumer staples, and utilities. Some examples are Walmart, Pfizer, and Southern Company.

One practical way traders analyse defensive stocks is through their beta value. Beta measures how much a stock moves compared to the broader market—stocks with a beta under 1 typically experience smaller fluctuations than the market average. Defensive companies often have low beta values (below 1), meaning they're less volatile.

However, defensive stocks typically offer modest potential returns during economic booms because they lack the rapid growth potential seen in sectors like technology or consumer discretionary.

Cyclical Stocks

Cyclical stocks perform in line with the economy—rising during expansions and struggling in downturns. They are common in industries like automotive, travel, manufacturing, and luxury goods.

For example, Ford and General Motors benefit when consumers have disposable income but see lower demand during recessions. Similarly, airlines like Delta and hotel chains like Marriott tend to surge in strong economies but suffer when travel slows.

Traders monitoring cyclicals often watch economic indicators like unemployment rates and consumer confidence to assess demand. For instance, Caterpillar stock—closely tied to construction activity—typically rises in economic booms but declines when construction slows.

The Bottom Line

Understanding the different kinds of stocks may help traders navigate the market. Whether focusing on growth stocks or monitoring cyclical stocks, knowing how each stock type behaves may support informed trading decisions. Those looking to trade a universe of stock CFDs, may consider opening an FXOpen account to access four advanced platforms, tight spreads, and low commissions.

FAQ

What Are the 4 Types of Stocks?

The four main different types of stocks are common, preferred, growth, and value stocks. Common stocks give shareholders ownership and voting rights, while preferred stocks offer fixed dividends and priority payouts but typically no voting rights. Growth stocks belong to companies expanding rapidly, often reinvesting their returns instead of paying dividends. Value stocks are generally those trading below their intrinsic worth and often show lower volatility compared to other stocks.

What Are the 4 Levels of Stock?

The stock market is often classified into large-cap, mid-cap, small-cap, and micro-cap stock types, based on company size. Large caps, such as Apple and Microsoft, have market capitalisations above $10 billion and are believed to experience lower volatility. Mid-caps range from $2 billion to $10 billion, often associated with relative stability. Small- and micro-cap stocks (ranging between $300 million-$2 billion and $50 million-$300 million, respectively) are generally associated with higher risk and are believed to offer greater return potential.

What Are the Four Segments of the Stock Market?

The stock market consists of the primary, secondary, third, and fourth markets. The primary market handles IPOs, while the secondary market includes exchanges like the NYSE and Nasdaq. The third market involves OTC trading of listed stocks, and the fourth market covers private institutional trades.

What Type of Stock Is the S&P 500?

The S&P 500 is a large-cap index, tracking 500 of the biggest US companies. It includes both growth and value stocks but primarily represents the overall large-cap market.