Last updated: 14 Aug, 2021 | 04:41 pm
Introduction on US stocks classification
When you invest, the type of stock you are picking for your portfolio has a lot to do with the returns you earn. While the two basic US stocks types are common and preferred shares, there are other classifications based on market capitalization, the risk involved, dividend payments, geographic location, and other factors.
For instance, if you want to invest for the long-term and accumulate wealth, and your risk appetite is high, then growth stocks can be an appropriate option for your portfolio. Similarly, depending on your risk appetite, financial aspirations, tenure for investment, you can choose the stocks. Thus, here in this article, there is a detailed guide about US stocks investment as per their classification.
Classification based on market cap
Market cap or market capitalization is the value of all the outstanding shares of any company. According to the market cap, there are three US stocks types -
Firstly, large-cap stocks are stocks of companies having a market capitalization of $10 billion or above. Though there is no specific definition or measure for the same, companies with a market cap of this amount are regarded as large-cap companies. The risk associated with large-cap stocks is the lowest amongst these three types of stocks.
2. Mid-Cap stocks:
Similarly, companies with a market cap between $2 billion to $10 billion are considered mid-cap companies, and their stocks are mid-cap stocks.
3. Small-Cap Stocks:
Finally, small-cap stocks are stocks of companies with a market capitalization of $300 million to $2 billion. These are comparatively newer companies, where the risk level is high.
Classification based on stock classes
The class of stocks is defined by the number of votes the owner of the share can cast. It is a rare form of classification within the common shares of any company. There are two classes of stocks, but any company can divide the same into multiple classes as per the number of votes.
These shareowners can cast more than one vote. The number of a vote per shareowner is as per the structure decided by the company board members.
2. Class B:
These shareowners get to cast fewer votes than Class A shareowners. For instance, if Class A shareholders can cast 5 votes, then Class B shareholders may be casting 2 votes each.
In classifying US stocks types based on the class of stocks, each class of stock gets a ticker symbol for identification. For instance, the shares of 21st Century Fox are classified as Class A and Class B. For Class A shares, the ticker symbol is FOXA, and for Class B, it is FOX.
Classification based on dividend payment
The following classification is based on dividend payment, one of the essential criteria for classifying stocks. According to dividend payments,
These stocks generate regular income for the investors in the form of dividend payments. These stocks have a high dividend payout ratio, while the volatility in these stocks is low. Mainly these stocks are offered by large-cap companies with a stable business, and the risk factor is lower. The dividends are paid out of the after-tax profits of the company. Even if the company pays $0.01 per share, it will be considered as a dividend-paying stock. Investors looking for regular income from their investment can choose dividend-paying stocks.
2. Non-dividend stocks:
Paying a dividend is not mandatory by any company. The company can choose to retain the profits and not pay a dividend to the shareholders. However, these stocks can be great investments, too, if the stock price rises over time. These are non-dividend stocks popular amongst the investors who want wealth accumulation over time and not regular income from investments.
Classification based on Investment Methods
Stocks can be classified as per the investment methods or based on the usage of such stocks for investments and returns. Mainly there are two such types of US stocks -
These stocks can generate huge returns and are thus very attractive to investors even though the risk level is also high. These are stocks of such companies which have enormous potential to grow; there is high demand for their products and services, have a futuristic approach, and are new companies. Investors use growth stocks for the accumulation of wealth over a long period. Due to high competition in the market, the growth can be sluggish sometimes, but if the company’s fundamentals can be retained at the right place, it can be highly beneficial for the investors in the long run.
2. Value stocks:
Another type of US stock based on the investment method is value stock. These stocks are of companies that are established and mature most of the time. However, the price of their stocks is not at par with the intrinsic value. So, there is room for price rise, and investors invest in such stocks to increase the value of their investment.
Classification based on fundamentals
As mentioned above, the market price of value stocks may not match the intrinsic value of the stocks as per the fundamentals, and that is how you can classify the stocks as per the company’s fundamentals.
If the intrinsic value is lower than the market price of the share, then it is an overvalued share. For instance, the market price of ABC Company is $1000 while the intrinsic value is only $700. So, eventually, the price will decrease and be equal to the intrinsic value. If you have overvalued stocks in your portfolio, it is time to book your profits.
2. Undervalued stocks:
On the other hand, if the intrinsic value is lower than the market price, it is an undervalued stock. Suppose the price of ABC Company’s stock is currently $500, but the intrinsic value is $700, so there is room for an increase of $200 for each company’s share.
Classification based on risk
Risk is evident in investments, and there are hardly any stocks that bear no risk at all. So, based on the risk a stock possess, they are classified as follows -
These are stocks of such companies which remain unaffected by business cycles, market volatility, and economic events. Even if there is a crisis, mainly these stocks will provide stable returns. Defensive stocks in a portfolio can balance the risk by reducing the volatility factor.
2. Blue-chip stocks:
Blue-chip means the best of the lot. These stocks are of such companies which are the best in their sectors. For instance, if you want to invest in IT stocks, then Infosys or IBM is the Blue chip company in the US and worldwide. Blue-chip stocks provide stable returns as the companies are mature ones, and thus the risk factor is very low.
3. Penny stocks:
On the other hand, there are penny stocks that carry a good amount of risk, but you can gain a lot if it clicks. These are stocks of low-quality or unrecognized companies having very low prices, usually less than even $1 for each share. These stocks are like make it or break it.
4. Speculative Stocks:
Speculation is expected in the stock market; knowingly or unknowingly, most investors do it. Speculative stocks are stocks that are extremely low in price at present. The companies they belong to have very low market capitalization or a specific, negligible market cap. However, the products they sell have massive demand in the market, or the product or services they are going to launch have exceptional demand in the market. So, by speculating, the investors can anticipate if the stock can rise in price or not and then invest accordingly.
Classification based on Business Cycle
Business cycles affect the prices of stocks and thus the investment portfolio of the investors. According to the business cycles, types of US stocks can be classified into 2 categories -
Stocks of firms that are into a cyclical or seasonal business like manufacturing, traveling, luxury goods, and others can perform very sluggishly or even provide negative returns when the economy is in a down phase. However, when the economy grows, these stocks can be phenomenal as well. So, it is affected by the ups and downs of the economy and the business they are part of. Cyclical stocks can even outperform the indices and peer companies’ stocks in the bull market.
2. Non-cyclical stocks:
On the contrary, non-cyclical stocks remain unaffected by the ups and downs of the economy and the business. As you read above about defensive stocks, these are similar to them and also known as secular stocks. For instance, the demand for salt will never increase or decrease drastically even if the market slows down or outperforms. Generally, these stocks are of companies that are into necessity goods and services like grocery shop chains. These stocks outperform in the bear market significantly.
Classification based on Geographies
As the name suggests, domestic stocks are the stocks of American companies. They trade on various stock exchanges of the USA.
2. International stocks:
International or foreign stocks are of companies having their base outside of the USA.
However, it is very difficult to distinguish stocks based on their location, especially if they are multinational companies. Even the foreign stocks can be up there on the US stock exchanges via American Depository Receipts (ADR).
Classification based on the stock market sectors
As per the Global Industry Classification Standard, the stocks can be classified into 11 categories based on the sectors they belong to-
Stocks of the energy sector are of companies dealing in oil and natural gas. It can also be companies producing materials, equipment and providing services to the oil and gas businesses. One of the top energy stocks in the US is ExxonMobil.
These are stocks of companies manufacturing and dealing in the supply of goods for different use in the manufacturing sector and allied applications. Chemical manufacturers, container producers, packaging material producers, and others fall under this sector.
3. Industrial Sector:
Stocks of transportation companies, logistics, railways, and other heavy-duty supplies and equipment mainly fall under this sector.
4. Consumer Discretionary Sector:
Stocks of automobile companies, luxury goods fall under this sector. The goods people demand when they have high financial status. There are hotels and restaurants, e-commerce, and other similar companies in this sector.
5. Consumer Staples:
These are necessary goods which consumers need every day. It does not depend on the consumer’s financial condition. Thus there is a demand for the same all the time. Food and beverage, personal care products, household products, tobacco, and similar businesses come under this sector.
This sector includes the business of two types –
b. Other types are the companies providing the surgical supplies, health insurance, medical diagnostic tools, and others.
As the name suggests, banks, brokerage houses, mortgage companies are found in this sector.
These are stocks of companies involved in providing technological services and innovation of technology as well. The businesses creating new software, hardware both fall under this sector.
9. Communication Services:
From the telecommunication sector to the media and entertainment businesses fall under this sector.
10. Real Estate Sector:
This includes stocks of companies involved in real estate businesses, whether developing new projects or maintaining the same, or getting tenants for the properties.
Finally, there is the utility sector which deals in providing the necessary supplies to the consumer. For instance, the company supplying the LPG or electricity to the household and the industries.
Classification based on ownership
Finally, the most common classification of stocks is here, or you can say the broad classification of stocks which are -
Most of the stocks trading on the exchanges are common stocks. These stocks provide ownership in the company when you purchase them. The shareholder gets voting rights, and also, in case of a company being wound up, they get a proportional share of the company’s assets. Still, their liability is limited to the investment they made in that company.
2. Preferred stocks:
On the other hand, there are preferred shares when it comes to dividend distribution and if the company dissolves. The preferred shareholders get dividends before the common shareholders. If a company is dissolved, the preferred shareholders get their portion of the asset first. And if anything remains, that is distributed amongst the common shareholders. However, they do not have any voting rights in the company, and they are not the owners.
So, to conclude, you can see how a single stock can be classified into different categories. Common stock can be a blue-chip stock as well as a penny stock. Again a common stock can be a value stock or a growth stock. It can be cyclical or non-cyclical. Thus, every investor needs to understand which US stock type to choose for their portfolio according to their investment purpose and risk appetite.