XS Online Trading Courses

Types of Stocks and Market Players

After having a look at the stock market, this lesson will explore the variety of stocks available in the market.

We’ll also identify the main participants in the stock market, from retail investors to institutional players.

What Are the Different Types of Stocks?

There are several types of stocks available to investors, each with its own characteristics and purpose. In this section, we will explore the main categories and how they differ in terms of ownership rights, risk, and potential returns.

What Are Common Stocks?

Common stocks are a type of security that represents ownership in a corporation. When you buy a share of common stock, you're buying a tiny piece of the company. This gives you some rights, such as:

• The right to vote on certain corporate matters, such as the election of board members.

• The right to receive dividends, which are a portion of the company's profits that are distributed to shareholders.

Common stock is typically the most volatile type of stock, meaning that its price can fluctuate significantly over time. However, common stock also has the potential for the highest returns.

If a company does well, the value of its stock will likely go up. On the other hand, if a company does poorly, the value of its stock will likely go down.

For example, shareholders in Apple Inc. have voting rights and potentially receive dividends.

What Are Preferred Stocks?

Preferred stocks are a type of stock that generally do not provide voting rights but offer a higher claim on assets and earnings than common stocks.

These stocks typically pay fixed dividends and are considered less risky than common stocks, particularly in income generation.

Here's a breakdown of what makes them preferred:

• Dividends: Preferred shareholders receive fixed dividends before common shareholders, ensuring priority in payouts. 

• Lower Risk: Preferred stocks are less risky than common stocks, as holders have a higher claim on assets in liquidation. 

• No Voting Rights: Preferred shareholders usually lack voting rights in company decisions.

What Are Growth Stocks?

Growth stocks are shares in companies that are expected to grow at an above-average rate compared to other companies in the market.

These stocks don’t usually pay dividends as the companies prefer to reinvest any earnings to accelerate growth in the short term.

Investing in growth stocks can be riskier, but they offer the potential for higher returns. Investors are typically attracted to growth stocks for the capital appreciation they offer rather than dividend income.

For example, Tesla Inc. is Known for its rapid growth and potential for significant capital appreciation, often reinvesting profits over paying dividends.

What Are Value Stocks?

Value stocks refer to shares of companies that appear to trade at a lower price relative to their fundamentals, such as dividends, earnings, or sales, making them appealing to value investors.

These stocks are often overlooked and undervalued by the market and might be companies going through a rough patch or simply unnoticed potentials.

Investing in value stocks is seen as less risky than growth stocks, but they require patience, as it may take some time for their true value to be reflected in their stock price.

For instance, The Coca-Cola Company (KO) trades at a lower price relative to its fundamentals, which is considered undervalued in the market.

Stock Classifications

Besides the different types of stocks, stocks are also classified.

Stock classifications refer to categorizing stocks based on various criteria such as market capitalization, industry sectors, and investment characteristics.

Market Capitalization

Market capitalization refers to the total market value of a company's outstanding shares. It is calculated by:

Multiplying the current market price of a single share x the total number of outstanding shares

Stocks are typically divided into three categories based on market cap:

• Large-cap (over $10 billion)

•  Mid-cap ($2 billion to $10 billion)

• Small-cap (under $2 billion)

Large-cap stocks are usually considered more stable, while small-cap stocks are often viewed as more volatile but with higher growth potential.

Sector and Industry

Stocks are also classified based on the sector and industry they belong to. A sector is a broad classification of businesses that have similar economic activities, like technology, healthcare, or finance.

Within each sector, there are various industries. For example, within the technology sector, industries include software, hardware, and semiconductors. Understanding sector and industry trends is crucial as they can have significant impacts on stock prices.

Market Players in the Stock Market

Stock trading involves a diverse group of participants, including:

• Retail investors

• Institutional investors

• Market makers

• Stock analysts and brokers

Each plays a unique role in influencing and driving the dynamics of the stock market.

Retail Investors

Retail investors are individual investors who buy and sell securities for their personal accounts. These investors may use savings to invest in stocks, bonds, mutual funds, and other securities.

Retail investors are considered non-professional market participants and typically trade in much smaller amounts than institutional investors.

With the rise of online trading platforms, retail investing has become more accessible, allowing more people to participate in the stock market.

Institutional Investors

Institutional investors are organizations that pool large sums of money and invest those funds into securities, real property, and other investment assets. They include pension funds, mutual funds, insurance companies, and hedge funds.

Institutional investors often hold significant stakes in companies and can exert considerable influence on a company’s management and strategies due to their large investment volumes and professional expertise.

Market Makers

Market makers are firms or individuals who stand ready to buy and sell securities on a regular and continuous basis at a publicly quoted price. They play a crucial role in maintaining liquidity and efficiency in the financial markets.

By providing bid (buy) and ask (sell) prices to a wide array of securities, market makers ensure that there's always a buyer and a seller for these securities, facilitating smoother transactions for investors.

Stock Analysts and Brokers

Stock analysts are professionals who analyze financial data and trends to give opinions on the performance of securities. They help investors make decisions on buying, holding, or selling stocks.

Brokers, on the other hand, are intermediaries who execute buy or sell orders for investors in exchange for a fee or commission. They provide access to the stock markets and often offer additional services like research, investment advice, and portfolio management.

Lesson Summary

• Types of stocks include common, preferred, growth, and value stocks, each with distinct features and investment implications.

• Stocks are classified based on market capitalization, sector, and industry, highlighting their impact on investment choices.

• Participants in the stock market include retail investors, institutional investors, market makers, and stock analysts and brokers.

In this lesson, we covered the essentials of stock types, classifications, and market players, laying the foundation for understanding the diverse stock market landscape. Next, we will delve into the mechanics of stock trading, where we'll explore how stock trading functions, deepening your grasp of the market's operational aspects.