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Stock | Classifications, Examples & Types

Hugh Zimmerbaum, Michael Cozad
  • Author
    Hugh Zimmerbaum

    Hugh Zimmerbaum is a prospective PhD student in Slavic Languages and Literatures. After earning his BA degree in Literature with a concentration in Russian Studies at Bard College in 2018, he spent two years as an EFL teacher on the Russian island of Sakhalin.

  • Instructor
    Michael Cozad

    Michael is a financial planner and has a master's degree in financial services.

Learn about the different types of stocks and their significance in the market. See the meaning of stock trading and the classification of stocks with examples. Updated: 11/12/2021

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What is a Stock?

Stock is a financial instrument that represents ownership of a fraction of a corporation. The owner of a stock is entitled to a part of the company's assets and profits in proportion to the amount of stock they own. This means that if a company has 1000 shares, and someone owns 200 of those shares, that individual has 20% ownership of the corporation. A stock definition must include its units, called shares. Corporations issue stock to raise money for their business. Shareholders buy stock hoping to earn capital gain and money from dividends, cash payments with which the company rewards its stockholders. Stock is typically traded on stock exchanges, venues where stock is sold, bought, and issued (offered to investors). The stock market is a key component of the economy. It allows companies to raise funds and for individual investors to use their savings to create growth.

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A photograph of the New York Stock Exchange (NYSE).

New York Stock Exchange

Types of Stocks

Corporations typically issue two different types of stocks: common and preferred. These represent the major classifications of stocks. Common stock is an investment security which represents ownership in a company. Holders of common stock are usually allowed to vote to elect a company's board of directors and receive dividends paid out by the company. Preferred stock is an investment security which may, depending on the company, represent ownership and which is also a debt instrument of the company. Because preferred stock combines aspects of debt and investment securities, they can be seen as falling somewhere in between common stock and bonds. Preferred stockholders have greater security and are paid set dividends at regular intervals, but rarely have voting rights.

Stocks differ from bonds, which are a form of debt equity, and which have their own market and set of risks. A traditional corporate stock definition does not include bonds. Many companies offer all three types of securities: bonds, common stock, and preferred stock.

Common Stock

Common stock yields the highest rates of return in the long run, and grants the stockholder voting rights. The voting rights typically extend to voting for the board of directors and voting on corporate policies. It is a riskier investment than preferred stock or bonds, however, because if a corporation is liquidated, the common stockholders receive their money only after the creditors, bondholders, and preferred shareholders have been paid. The benefit of common stock is that it often outperforms bonds and preferred stocks in the long term. Many corporations offer common stock, such as Wells Fargo & Company, which issues common stock on the New York Stock Exchange (NYSE: WFC).

Preferred Stock

Unlike common stockholders, preferred stockholders typically do not have voting rights. They do have priority over common stockholders in the payment of dividends. The dividends for preferred stock are typically paid either monthly or quarterly, and typically are either fixed or set in terms of a benchmark interest rate. If a company is struggling to pay its dividends or is liquidated, the preferred stockholders will be paid before the common stockholders. Preferred stock offers more predictable income than common stock. Along with common stock and bonds, Wells Fargo & Company also offers preferred stock, such as its Series L (NYSE: WFC-L).

Other Types of Stock

Although common and preferred stock are the two main types of stock, stock options may be customized by a corporation for various reasons, such as to give privileged voting rights to the owners of a certain class of stock. There are also some other classifications of stock, such as growth stock, stock which is expected to grow at a faster rate than the overall market, and value stock, stock which appears to be undervalued in relation to its dividends, earnings, or sales.

An additional distinction is made between large-cap and small-cap stocks. Large-cap stocks are frequently traded and tend to be more stable. Small-cap stocks are stocks from new companies and more prone to change.

Examples

There are many examples of companies which offer stock. Thousands of companies are listed at the two major stock exchanges in the United States, NASDAQ and the New York Stock Exchange (NYSE). Stocks from the following ten companies were the most traded on nasdaq.com in 2020:

  • Tesla (TSLA)
  • Apple (AAPL)
  • Amazon (AMZN)
  • Microsoft (MSFT)
  • Nio Limited (NIO)
  • Nvidia (NVDA)
  • Moderna (MRNA)
  • Nikola (NKLA)
  • Facebook (FB)
  • Advanced Micro Devices (AMD)

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Frequently Asked Questions

What are the 2 types of stock?

The two types of stock are common stock and preferred stock. Common stock represents ownership in a company, grants voting rights, is more risky and typically more profitable than preferred stock. Preferred stock may represent ownership in a company, typically does not grant voting rights, and does grant priority over common stock in receiving dividend payments.

What is a stock simple definition?

Simply defined, a stock is a financial instrument which represents partial ownership in a company. If a company has 1000 stocks and someone holds 400 stocks, this represents 40% ownership in the company.

What is stock example?

There are many examples of stocks. One widely bought and sold stock is Amazon. Other popular stocks include Apple, Tesla, Facebook, and Microsoft.

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