Different Types of Stocks: Complete Guide for Beginners 2025

2025.08.12 2025.08.12
Different Types of Stocks: What You Should Know Before Investing

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

Stocks can be divided into several categories based on how they behave in different market conditions. When it comes to risk, investors often distinguish between blue-chip and speculative stocks. In terms of returns, common classifications include value stocks, growth stocks, and dividend stocks. Understanding different types of stocks will help you form a balanced investment portfolio.

This review will introduce you to the main types of stocks, their differences and price behaviour, and how to apply this knowledge in trading and investing.

Major Takeaways

• Grasping the main types of company shares is essential for creating a diversified investment portfolio tailored to different goals and time frames. Besides, each type comes with its own expected average returns and associated risks.
• There are common and preferred stocks, small-, mid-, and large-cap stocks, growth and value stocks, blue-chip and sector-specific stocks, as well as stocks with positive, negative, and zero correlation.
• Stocks that grow rapidly are considered highly risky. The greater the potential return, the higher the likelihood of a sharp reversal and a deep price decline.
• To assess a stock’s risk level, investors typically rely on valuation multiples derived from financial statements, beta coefficients, and fundamental analysis of a company and its industry.
• A diversified conservative investment portfolio typically includes up to 60% international equities, with the remaining 40% allocated to stable income-generating assets such as bonds, gold, currency deposits, and defensive stocks.

What Are the Different Types of Stocks for Your Investing Portfolio?

Company shares can be divided into several categories based on various criteria. For example, they can be classified as cyclical or non-cyclical depending on how they react to economic events. In terms of capitalization, they can be large-, medium-, or small-cap shares. Depending on the risk level, they can be divided into steadily growing and venture-backed stocks. Understanding these classifications is key to navigating the stock market and crafting an investment portfolio that aligns with your financial goals.

Common Stock vs Preferred Stock

Stocks are categorized as common or preferred, depending on the ownership rights.

• Both stock classes are traded on the stock exchange.
• The legislation of certain countries may restrict the volume of preferred stocks issued. For example, in some countries, the number of preferred shares may not exceed 25% of the authorised capital of a joint-stock company.
• Common stocks cannot be exchanged for preferred ones. However, some types of preferred stocks can be exchanged for common stocks.

Let’s take a closer look at each class of stocks.

Common Stock Characteristics

Common stocks or ordinary shares are securities issued by joint-stock companies that grant their shareholders the right to vote at shareholders’ meetings (1 share = 1 vote) and to receive dividends. Dividends are paid out from a company’s profits only after obligations to preferred shareholders and creditors have been met. Ultimately, the amount and timing of dividends hinge on the company’s financial health and the decisions made by its board of directors. 

• A 50% +1 shareholding constitutes a controlling stake, giving common stockholders a majority of votes when making certain decisions such as appointing or replacing the board of directors, approving strategic plans, budgets, and major deals.
• A 25% +1 shareholding is considered a blocking stake, allowing a shareholder to block decisions made at the general shareholders’ meeting, provided the remaining shares are not consolidated into a controlling stake.

Only common stocks can be included in controlling or blocking stakes, unless the company's charter grants voting rights to holders of preferred stocks.

Preferred Stock Features

Preferred stocks, also known as preference shares, offer holders certain advantages over common shareholders but also come with limitations. They typically provide a fixed dividend income and generally do not carry voting rights unless otherwise specified in the company’s charter.

Characteristics of preferred shares:

• Preferred shares generally offer a fixed dividend or interest rate, but payments are not guaranteed. Dividend distribution is subject to approval at the shareholders’ meeting. If approved, preferred shareholders are paid first, and any remaining profits are distributed to common shareholders.
• Preferred shareholders are eligible for participating dividends. If common shareholders receive a higher dividend than the fixed amount granted to preferred shares, preferred shareholders may receive an additional payout to match or supplement that amount.
• Preferred shareholders are paid before common shareholders in the event of company liquidation. They receive the remaining assets after a company settles its debts.
• If dividends were skipped in previous years and the shares are cumulative, preferred shareholders are entitled to receive the missed payments once distributions resume.

Differences between common and preferred stocks:

Growth Stocks vs Value Stocks: Performance Comparison

Stocks are typically evaluated based on their long-term income potential and the key factors that drive it. Thus, there can be either growth or value stocks. A mix of both can help create a balanced, moderately volatile portfolio, though it is essential to review it regularly.

Growth Stocks Explained

Growth stocks are shares of companies that demonstrate strong and consistent increases in revenue and earnings. They often outperform the broader market across several key financial metrics. Their growth is typically driven by factors like innovative products or favorable industry trends.

Key features of growth stocks and their issuers:

• high P/E ratio, often well above the market average;
• the PEG ratio (Price/Earnings to Growth) around 1 or higher;
• low or no dividend payouts, as profits are reinvested into company development;
• high volatility, since investors may sell their stocks after sharp price increases;
• significant upside potential, provided rising company earnings.

Examples of growth stocks: stocks of technology companies developing AI, cloud computing, and blockchain technologies, as well as biotechnology and semiconductor stocks.

Value Stocks Defined

Value stocks are shares that trade below their intrinsic value and are considered undervalued by the market. Investors buy them with the expectation that the stock market will eventually recognize the company’s true worth, leading to a price increase. These companies typically have stable operations, consistent earnings, and low volatility. Their stocks also tend to be more resilient during global market downturns.

Key features of value stocks and their issuers:

• low P/E ratio (usually below the market average);
• low P/B ratio (price-to-book value);
• relatively high dividend yield;
• stable business with consistent profits.

Differences between growth and value stocks:

Stock Classifications by Market Capitalization

Market capitalization is the total value of a company expressed as the number of shares multiplied by their current price.

Classification of stocks by market cap:

• Large capitalization: $10 billion and more.
• Medium capitalization: from $2 billion to $10 billion.
• Small capitalization: from $300 million to $2 billion.
• Micro-capitalization: from $50 million to $300 million.

Although this classification is widely used, it is still somewhat arbitrary. Firstly, it does not account for regional differences: a company considered small in the US might be regarded as large in a smaller developing economy. Secondly, if a surge in share prices pushes a company into the next category, it can remain in its original stock index for a long time. For example, the Russell 2000 small-cap index includes companies with market capitalizations exceeding $2 billion.

Large-Cap Stocks

Capitalization: $10 billion and more.

Key features of large-cap stocks:

• High liquidity. Such stocks are easy to buy/sell without significantly affecting the price.
• Business stability. The companies are crisis-proof and time-tested.
• Moderate volatility. Exchange rate fluctuations are less sharp compared to mid- and small-cap companies.
• Strong transparency and easy access to company data. Extensive information, including financial statements, market analyses, and forecasts, is available for investors.
• Significant institutional ownership. The majority of shares are controlled by major funds and investment companies.

These stocks are well-suited for long-term investing and conservative strategies, especially those aimed at generating steady dividends. They are also a good choice for beginners who prefer stability over chasing short-term price swings.

Examples of large-cap stocks include Apple, Nvidia, and MicroStrategy. Almost all companies listed on the NASDAQ, S&P 500, and Dow Jones indices fall into this category.

Mid-Cap Stocks

Capitalization: from $2 billion to $10 billion.

Key features of mid-cap stocks:

• Moderate liquidity. Trading volumes are enough to enter/exit the market without significant slippage, but spreads are wider than those of large-cap stocks.
• Balanced growth and stability. Mid-cap stocks generally carry less risk than small-cap stocks while offering more upside potential than market giants. They can deliver solid performance and rapid growth.
• Increased volatility. Price fluctuations are more pronounced than those of large-cap stocks. Provide opportunities for short-term aggressive strategies.
• Moderate dividends. Such companies typically invest most of their profits in their own development. Dividends are paid less frequently and in smaller amounts than those of blue chip companies.
• Narrow specialization. These companies often operate in highly focused sectors, which can either limit their growth potential or serve as a powerful driver of expansion.

Mid-cap stocks are often chosen for aggressive strategies and targeted investments in specific industries, where investors anticipate a sharp price increase caused by some fundamental factors.

Examples of mid-cap stocks: companies from the S&P MidCap 400 and Russell Midcap index.

Small-Cap Stocks

Capitalization: from $300 million to $2 billion.

Key features of small-cap stocks:

• Low liquidity and high volatility. The difference between the buy and sell prices is large due to relatively small trading volumes.
• Limited access to companies’ financial information.
• Increased operational risk. Dependence on narrow market segments or a single product, and a lack of business diversification.
• High sensitivity to industry news.
• Significant growth potential if successful. With effective development of a specific business area, a company’s market capitalization can surge. However, only a small percentage achieve this level of success, and identifying such opportunities in advance is challenging.

Such stocks are suitable for venture capital investment. Examples: companies listed on the S&P 600 and Russell 2000 indices.

Specialized Stock Categories

This category includes stocks with unique features in terms of price behaviour or a specific purpose. For example:

• Dividend stocks are typically bought for their payouts, with investors following a buy-and-hold strategy.
• Class A, B, and C stocks are securities that have different values and carry different voting rights. Class A stocks are for those who wish to participate in company management, while Class B stocks are for retail investors.
• Depositary receipts (ADRs/GDRs) represent ownership in the shares of foreign companies and are traded on local stock exchanges.

A novice investor should first and foremost know the difference between blue-chip stocks and securities issued by other companies.

Blue-Chip Stocks

Blue-chip stocks are shares of large companies with high market capitalization. These companies dominate their industries and are trusted by investors.

Key features of blue chip stocks and their companies:

• Such companies have diversified businesses. They set trends for several industries and sometimes for the entire stock market.
• These stocks are included in major stock indices. The majority of the stocks are owned by institutional investors.
• They are fully transparent, with international-level audits and strict disclosure standards.
• Tend to remain relatively resilient during periods of recession.

This type of stock is suitable for long-term investment.

Penny Stocks

Penny stocks are shares priced below $5 with a small market capitalization. They are typically traded on over-the-counter (OTC) markets rather than major exchanges, and are generally not included in major stock indices.

Key risks associated with penny stocks:

• Low trading volumes and liquidity. These shares can be difficult to sell quickly, and their bid–ask spreads are often much wider than those of blue-chip stocks.
• Lack of publicly available information. Such companies are not required to publish detailed financial statements and may conceal losses or debt obligations.
• Vulnerability to price manipulation. Penny stocks can be targets for schemes such as pump and dump, where prices are artificially inflated before a rapid sell-off.

Unlike blue-chip stocks, whose growth potential is often capped by their already massive scale, the shares of smaller companies can experience sharp short-term spikes. Such rallies may be triggered by news of an upcoming acquisition or the breakthrough success of a newly tested product.

Dividend Stocks

Dividend stocks are shares of companies that make regular dividend payments to their shareholders. They are generally suited for long-term investing rather than quick speculative trades. Dividend distributions are determined by the decision of the shareholders’ meeting and are typically paid every 3, 6, or 12 months.

Key metrics that investors focus on:

• The amount of dividends per share, payout stability, and dividend growth rate.
• The dividend payout ratio is the portion of a company’s net profit that is distributed as dividends.
• Dividend yield is the ratio of dividends to the value of shares.

A company pays dividends when it makes a profit. However, profitability does not necessarily mean that the share price will rise. Therefore, if the share price falls, dividends can partially offset the loss.

Sector and Cyclical Classifications

In recent years, the technology sector has enjoyed immense popularity. The development of virtual and augmented reality technologies and AI has helped some companies grow by more than 100% in a year. The NASDAQ index has significantly outperformed the S&P 500 in terms of return over the past 1 and 5 years.

Once you figure out which sector of the economy is the most promising and which one is more stable, you can rebalance your portfolio and reduce the potential risk of losses.

Cyclical Stocks

Depending on how the price reacts to the economic situation, stocks can be divided into cyclical and non-cyclical:

• Cyclical stocks tend to rise during economic upturns and fall during recessions. This category includes tourism and automotive companies, since consumers tend to abandon these sectors first during economic slumps.
• Non-cyclical stocks show a relatively steady trend and low volatility. This category includes companies that produce essential goods such as food, medicine, etc.

Cyclical stocks are best for speculative trading during economic booms, when the macroeconomic statistics are positive. Non-cyclical stocks are for conservative long-term investors who are ready for economic downturns.

Defensive Stocks

Defensive stocks are shares of companies whose revenues and profits remain relatively stable regardless of economic cycles. Besides, this category covers non-cyclical stocks described above.

Key features of defensive stock companies:

• Steady demand. Products and services remain in demand even during times of crisis. These are essential goods, utilities, and medicines.
• Low volatility compared to growth stocks and indices.
• No significant drawdowns.

These stocks are used to reduce the overall volatility of an investment portfolio during periods of uncertainty. They are suitable for risk-averse investors.

An example is the shares of Walmart, the world’s largest retail chain.

Walmart’s 5-year return is 117.26%. The company has successfully navigated the global recession caused by COVID-19 and is rapidly recovering after the decline.

Sector-Specific Stocks

MSCI and Standard & Poor’s created the Global Industry Classification Standard (GICS) to categorize publicly traded companies.

The classification includes:

• 11 sectors (energy, materials, industrials, two consumer goods segments, health care, financials, information technology, communication services, utilities, and real estate).
• 25 industry groups.
• 74 industries.
• 163 sub-industries.

The classification is regularly revised.

This method of classifying stocks helps investors understand how each sector contributes to overall portfolio returns, identify promising opportunities, and diversify risk. When analyzing financial statements, a company’s valuation multiples are compared not only to the market average but also to the averages for its specific industry or sector.

Geographic and Market-Based Classifications

The US stock market has historically been regarded as one of the most promising in the world. Its indices have consistently outpaced their European, Asian, and Latin American counterparts in terms of growth. Backed by the world’s largest economy, strict regulatory standards, and a high level of transparency, the US market remains highly attractive to investors worldwide. At the same time, adding stocks from Brazilian, Indian, and German companies can provide risk diversification opportunities.

Domestic vs International Stocks

Domestic stocks offer a key advantage, such as easy access to information for analysis. Living in the same country means you have a solid understanding of the national economy and the specifics of local markets, without the challenge of a language barrier. You also know exactly where to find reliable company data. For foreign investors unfamiliar with regional market nuances, this process can be far more challenging.

Besides, consider profitability and the investment currency. If domestic stocks yield less than international ones in US dollars, the choice is clear. However, if your holdings are in your national currency and inflation is high, domestic stocks can still be a strong investment option.

Emerging Market Stocks

Emerging market stocks can be appealing due to the unpredictability of government economic policies. In contrast, the US stock market benefits from transparency, predictable Fed policies, and clear responses to macroeconomic data. While emerging markets are generally less predictable, large-cap stocks in regional markets can sometimes provide more growth potential than some US assets.

The following example illustrates this point:

The market capitalization of Argentina’s largest company, MercadoLibre (MELI), rose by 86.69% in US dollar terms in 2023, by 10.09% in 2024, and by 37.98% in 2025 (as of July 23, 2025). MercadoLibre is the leading e-commerce and online auction platform in Latin America.

Following Argentina’s bout of hyperinflation, the company shifted its focus to neighboring markets. Today, 75% of its revenue comes from Brazil and Mexico, making these countries key growth drivers. Its shares are listed on the NASDAQ as well as several other stock exchanges.

Several nuances:

• The currency of investment plays a crucial role. If the stock price rises in the local currency during a period of inflation, its value in US dollars may stay the same. For domestic investors, this can serve as protection against inflation. However, for foreign investors, such assets are usually less attractive.
• Some of the largest companies’ stocks can be accessed on the US market through ADRs, eliminating the need for a broker in India or South Korea. Instead, you can buy shares of Indian and Korean companies via a US-licensed broker. For example, ICICI Bank (NYSE: IBN) has delivered share price growth in US dollars for nine consecutive years, with an average annual return of 23.17%.

The developing markets of Brazil, India, Indonesia, Turkey, and Mexico are particularly noteworthy.

IPO and New Issue Stocks

IPO stands for initial public offering, which is the first time a company’s stock is sold to the public. When a company is performing well and wants to raise money to expand its business, it issues shares. If investors consider a business promising, they buy shares hoping that their price will appreciate or that the company will pay dividends.

Example: In early June 2025, the American company Circle (CRCL), issuer of the USDC stablecoin, held an IPO. USDC is the main competitor of USDT (Tether), the largest stablecoin by market capitalization.

Amid widespread enthusiasm for cryptocurrencies and blockchains, Circle’s share price quadrupled in less than two months. Despite a correction, the total gains amounted to more than 200%.

Notably, this is a promising niche, which has propelled its expansion. However, there are plenty of examples of companies whose share prices plunged by more than 20–30% after their IPO and never recovered.

A secondary offering is another high-risk way for a company to generate capital. An increase in the supply of shares typically puts downward pressure on the price, so new issues are often sold at a discount. The investor’s task is to assess the likelihood of a price drop and weigh the potential loss against the offered discount.

IPO and secondary offering calendars are available on many market analysis websites. Below is an example of a secondary public offering calendar:

How Many Types of Stocks Are There: Choosing Your Investment Mix

Basic rules for building your investment portfolio:

• Define your investment goals and time frame. For example, let’s say you want to earn 50% per annum in 3 months. You should be aware that this is a high-risk investment, and your portfolio may result in a loss.
• When evaluating companies, review their financial statements with a focus on income stability, resilience during challenging periods, low debt levels, diversified business operations, and reliance on solid fundamental factors.
• Diversify your portfolio. Add defensive stocks, such as those that avoided negative territory or experienced minimal drawdowns during periods of global economic stagnation.
• Rebalance your portfolio regularly, once every 6-12 months. Review the proportions and composition of your securities. Get rid of unprofitable stocks and add promising ones. Look for undervalued assets and sell overvalued ones.

You set your portfolio’s risk level according to your own investment style. It may consist of specialized stocks, which are expected to skyrocket, or it could be a balanced mix with more modest returns, where gains in others offset declines in one stock.

An alternative option is investing in stock indices or ETFs. Indices are baskets of stocks selected based on specific criteria. ETFs are managed by professional investors. There are many ETFs available, and the choice depends on your investment goals and preferences.

Risk Tolerance Assessment

When building an investment portfolio, it is crucial to match the asset mix to your personal risk tolerance. Some companies generate stable but modest profits, while others have the potential to double their share price in a year but carry much higher risk. To balance these extremes, investors often add other assets to a diversified portfolio, such as fixed-income bonds, which offer predictable returns and a nearly guaranteed payout.

Strategies for allocating assets in a portfolio in terms of risk and return:

• Conservative (low risk and minimal return): 10–30% stocks, 70–90% bonds and currencies.
• Moderate (balanced risk): 40–60% stocks, 40–60% bonds.
• Aggressive (high risk and high return): 70–90% stocks, 10–30% bonds.
• All-equity: 100% stocks, including sector-specific stocks.

Distributing assets in a portfolio by stock types:

• 30% in stocks trading in a strong uptrend. These are stocks of companies with consistently high demand, many of which also pay steady dividends.
• 50% in growth stocks, at least a third of which are blue-chip stocks. Any lack of profit will be offset by value stocks.
• 20% invested in stocks of small-cap or niche-sector venture companies.

The degree of risk can be assessed using a company’s financial statements. If valuation multiples over the past four quarters are consistently higher or lower (depending on the multiple) than the market average, the company may be overvalued or undervalued. A beta above 1.2 indicates a higher risk. Besides, you should consider credit ratings from reputable agencies.

Diversification Strategies

Diversification means the distribution of investments among different types of securities in order to minimize risk.

Diversification strategies in terms of stock types:

• By sector. Include securities from at least 5–7 industries, allocating no more than 25% of capital to a single sector (e.g., no more than a quarter in IT or healthcare).
• By market capitalization. A balanced mix might be around 60% large-cap stocks(> $10 billion), 30% mid-cap stocks ($2–$10 billion), and 10% small-cap stocks (
• By geography. You may allocate 60% to domestic stocks and 40% to international stocks of developed and developing countries. This approach reduces dependence on a single economy or currency.
• By the number of companies. To limit risk, a portfolio should consist of 20–30 stocks. Fewer stocks do not provide sufficient diversification, while too many can complicate management and increase costs.
• By correlation. Select securities with low correlation to each other (coefficient < 0.6 or > -0.6).

Furthermore, diversification is not just about stocks. A balanced investment portfolio might include 60% stocks, 10% high-risk cryptocurrencies, 10% precious metals, and 20% other types of financial instruments.

Investment Goals Alignment

Types of investment approaches:

• Short-term trading with speculative stocks. Choose stocks with high volatility, liquidity, and minimal margin.
• Long-term investing. Select blue-chip stocks from different industries.
• Dividend yield. Opt for dividend stocks from top companies with stable payouts.
• Aggressive strategy. Go for speculative stocks in venture capital segments, the technology sector, mid-cap companies, and emerging markets.
• Risk hedging. Choose shares of steadily growing companies, even if they are expanding slowly (e.g., the consumer sector).

Moreover, you can combine different investment strategies.

Conclusion

A newbie stock investor should know the following things:

• Stocks can be purchased directly on stock exchanges. This approach usually involves high commission fees and requires an initial investment of around $1,000. However, a stock exchange gives you access to thousands of stocks from markets worldwide, making it ideal for long-term investing. Alternatively, you can trade stocks through CFDs, which require a much lower initial capital and have lower commission fees, making this approach better for short-term speculative strategies.
• Blue-chip stocks are often a preferred choice for conservative investors. However, they are not risk-free, and losses are still possible. Historically, their average annual return over a 5–10 year period has ranged between 15% and 30%.
• Diversification is key. A portfolio of 20 stocks would be optimal. You can choose stocks yourself based on your goals and risk tolerance.

Currency pairs tend to trade within a narrow range, while cryptocurrency rates are usually hard to predict. Therefore, stocks are the best investment tool for beginner traders. Try trading stocks on the LiteFinance demo account!