With more than 5,000 different companies listed on the U.S. stock exchanges, the stocks of these companies can be categorized in many different ways. Differentiating features include types of shares, size of a company and type of business. Investors with an understanding of different categories of stocks can use this information to be more informed and better set up diversified portfolios.
Types of Stocks
One way to categorize stocks is by types of shares and types of company organization. A corporation has shares of common stock, which represent ownership in the company. Master limited partnership -- MLP -- and limited partnership -- LP -- companies have units that trade on the stock exchanges in the same manner as common stock shares. MLP and LP units do not have the same ownership rights as common stock shares. Real estate investment trusts -- REITs -- are another type of non-corporation company with publicly traded shares. All of these company types may issue preferred shares as an alternative way to raise capital. Preferred shares are closer to debt securities than to the equity represented by common shares.
A widely used category to describe stocks is company size or market capitalization. Investors use the terms large cap, mid cap and small cap to indicate total company value. The market capitalization of a company is the share price times the number of shares outstanding. The definitions of the market cap categories are flexible, but a commonly used breakdown is market cap greater than $10 billion for large cap, $2 billion to $10 billion for mid cap, and smaller than $2 billion for small cap. The largest of the large cap companies, such as Apple, General Electric and Wal-Mart, have market caps measured in the hundreds of billions of dollars. At the opposite end are small-cap companies with values measured in the tens of millions.
Stocks can be categorized by the type of businesses in which the companies operate. Standard & Poor's divides stocks into 10 broad categories, which include energy, technology, consumer staples, telecommunications, health care and financials. There can be sub-categories under the broad categories. For example, in the energy sector you can divide stocks into oil and gas drilling companies, coal mining companies, pipeline companies and renewable energy companies. Stocks in the same sector tend to be influenced by the same economic conditions. An investor can diversify a stock portfolio by ensuring she owns stocks from a range of sectors.
Categorizing stocks by widely used investment themes allows an investor to select stocks that meet investment goals or strategies. Growth stocks are companies with fast-growing sales and profits, as opposed to value stocks, which are companies that are evaluated by the value of a company's assets and business potential. Other investment themes that put stocks into categories include dividend growth stocks, high-yield stocks and cyclical stocks. An investor who buys a growth stock has different investment return expectations than an investor who chooses high-yield stocks.
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