Types of Stocks: A Simple Guide to Smarter Investing

Not all stocks are built the same. Common stock offers ownership, voting rights, and long-term growth potential—ideal if you’re betting on a company’s rise. Whereas preferred stock prioritizes consistent dividends and downside protection, making it a go-to for income-focused investors.

Common vs. Preferred: The Two Major Stock Categories

Here’s how to differentiate between common stocks and preferred stocks:

What common stock really gets you

When most people talk about investing in the stock market, they’re talking about common stock. It’s the go-to choice for everyday investors, and for good reason. But owning common stock comes with specific features—some exciting, some risky—that are worth understanding before you dive in.

1. Ownership and a share in the company’s success

Owning common stock means you literally own a part of the company. Even if it’s just a fraction, that ownership entitles you to a piece of the company’s assets and profits. For example, if you own 100 shares in a company that has 10,000 shares total, you own 1% of the business.

As the business grows and becomes more valuable, your piece of the pie grows with it. This is one of the most appealing aspects of common stock; it aligns your investment directly with the company’s performance. If the company thrives, so do you. That connection to growth makes common stock a powerful wealth-building tool over time.

2. Voting rights to influence company decisions

Most common stockholders also get voting rights, usually one vote per share. That means you can have a say in key decisions, like electing the board of directors or approving company policies.

If you only own a small number of shares, your vote might not carry a ton of weight, but it still gives you a voice. In large companies, the impact might be more symbolic, but the right to vote reinforces your role as part-owner.

3. Growth potential and capital appreciation

One of the biggest reasons investors buy common stock is its potential for growth. If a company performs well and grows over time, its stock price typically increases—meaning  your investment grows, too. This is why common stock is such a staple for long-term investors.

Think of the early days of companies like Apple or Amazon. Investors who held on to those companies’ stock reaped serious rewards. But the flip side is volatility. Stock prices can drop sharply if a company hits rough patches, so while the upside is big, it comes with risk.

4. Dividends as a potential income stream 

Some companies share their profits through dividends, or regular payouts to shareholders. This can be a great way to earn passive income while holding onto your stock, but it’s not guaranteed. 

Dividends depend on how well the company is doing and whether the board decides to distribute earnings. A company might reduce or even eliminate dividends in tough times, so while they’re a nice bonus, they shouldn't be your only reason for investing in a stock.

5. Accessibility and liquidity for investors

One of the most convenient things about common stock is how easy it is to buy and sell. You can trade shares on public exchanges quickly and at relatively low cost. This liquidity means you can convert your investment into cash whenever you need to—there’s no waiting around for buyers or complicated exit strategies. That flexibility matters, especially when it comes time to decide when to sell a stock.

Plus, common stocks are available across a huge range of industries and price points, making them an ideal starting point for new investors. Whether you want to build a diversified portfolio, make regular trades, or just dip your toes in the market, common stocks offer a flexible, accessible entry into investing.

If you’re curious about how to start trading, check out my guide that breaks it down.

What preferred stock really gets you

Preferred stock tends not to catch the attention of newer investors, but it can be a great fit for those who value stability and predictable income. While it doesn’t come with all the bells and whistles of common stock, it offers some clear advantages—especially if you’re focused on cash flow over capital growth.

1. Priority in dividends

Preferred shareholders get paid first when it comes to dividends. These payments are typically fixed and often resemble bond interest: i.e., they’re reliable and predictable. This makes preferred stock a solid option for income-focused investors, especially when consistency is more important than growth.

Unlike common stock dividends, which can change or disappear, preferred dividends tend to be more stable and regular.

2. Less risk in case of bankruptcy or liquidation

If a company runs into serious trouble and has to liquidate its assets, preferred shareholders are next in line after bondholders. That means there’s a better chance you’ll recover some of your investment compared to common shareholders, who are at the bottom of the payout ladder. It’s not a guarantee, but it’s a layer of security that helps reduce the total downside.

3. Stable but limited growth potential

Preferred stock tends to be less volatile than common stock. That means fewer dramatic price swings, which can be great if you value stability. However, the trade-off is that preferred shares don’t usually shoot up in value like common stocks sometimes do.

If you’re chasing big growth, preferred stock may not be the right fit. But if you’re content with steady, reliable returns, it’s worth considering.

4. No voting rights or control

Unlike common shareholders, preferred stockholders don’t get voting rights. So while you get paid first, you won’t get a say in company decisions. For most income-focused investors, that’s not a big deal. But if having a voice in the company’s direction matters to you, this could be a downside.

5. More predictability for income-focused and retirement investors

Preferred stock is especially useful for those who are nearing retirement or already retired. With fixed dividend payments and less price volatility, it’s well suited for anyone relying on steady investment income.

It also works nicely in tax-advantaged accounts like IRAs, where reinvested dividends can grow without immediate tax consequences. If you’re looking to build a safer, more predictable income stream, preferred stock checks a lot of boxes.

Size Matters: Small-, Mid-, and Large-Cap Stocks

Understanding the type of stock is only part of the equation. Company size, measured by market capitalization, can significantly impact how your investments perform.

1. Large-cap stocks

Large-cap stocks are companies worth $10 billion or more, and they’re usually household names—think Apple, Microsoft, or Amazon. They offer stability, consistent earnings, and often a steady stream of dividends, even during economic turbulence.

These companies are less volatile than smaller ones, so they’re a good fit if you’re looking to avoid big swings. While they may not deliver explosive growth, they’re reliable and can anchor a long-term portfolio.

2. Mid-cap stocks

Mid-caps—companies valued between $2 billion and $10 billion—offer a compelling mix of growth and stability. They’re often past the high-risk startup phase but still have plenty of room to grow.

Some of today’s large-cap giants started out as mid-caps, and investing in this range lets you tap into companies that are still climbing the ladder. Mid-caps can also offer exposure to niche sectors or emerging trends, giving your portfolio a healthy dose of diversity with balanced risk.

Historically, mid-caps have outperformed both large- and small-cap stocks in certain periods, giving you the best of both worlds: stability with growth potential.

3. Small-cap stocks

Small-cap stocks, with market caps under $2 billion, are high-risk, high-reward territory. These are often young companies in early growth stages. The upside? If you get in early on the next big thing, your gains could be massive.

But the downside is real; many small-caps are unproven in their profitability, more vulnerable to economic changes, and more likely to fail.

Still, with proper diversification, small-caps can bring valuable upside to a portfolio and keep things exciting for long-term investors. Spread your investments across different companies or use small-cap index funds and ETFs to protect against the inevitable failures while still benefiting from the successes.

Growth Stocks vs. Value Stocks: Which Strategy Will Drive Your Portfolio?

Beyond stock type and size, your investing approach—growth vs. value—is another critical piece of the puzzle. Both have their place, and understanding how they fit into a lazy portfolio can help you make smarter decisions that fit your financial goals.

What are growth stocks?

Growth stocks are companies that are scaling fast and reinvesting their profits back into expansion. These businesses often post annual earnings growth rates of 15–20% or more. They’re found across a variety of industries but are especially common in tech, healthcare, and retail.

The trade-off? They don’t usually pay dividends, and their valuations can soar beyond fundamentals. But if you’re in it for the long haul and can stomach some volatility, growth stocks can pay off big.

Growth stocks are for you if…

• You’re comfortable with high volatility and can handle market swings without panicking. Growth stocks are known for their price fluctuations, which can be significant during market highs and lows.
• You’re investing with a long-term horizon and don’t need immediate returns. These stocks often take time to reach their full potential, and patience is key to reaping their benefits.
• You’re willing to accept the risk of overvaluation. Growth stocks can become overpriced if investor expectations get too high, and understanding this risk is essential.
• You want to ride the wave of innovation. Investing in growth stocks means betting on companies that are often driving new technologies or business models, like Tesla in electric cars or Apple in consumer tech.
• You have a higher risk tolerance and can afford to weather the storm. Growth stocks can underperform or even crash during downturns, so they’re best for those who can afford to take on more risk.

What are value stocks?

Value stocks are often overlooked or out of favor, trading below what they’re actually worth based on financial metrics. These companies might be facing short-term challenges, but they typically have solid fundamentals. The goal is to buy them cheap, wait for the market to catch up, and then profit when the stock rebounds.

Value stocks are for you if…

• You’re patient and willing to wait for the market to recognize the stock’s value. Value investing often requires a long-term approach, as the market can take time to appreciate the true worth of a company.
• You prefer lower volatility in your investments. Since value stocks are typically more stable, they tend to experience less dramatic price swings than growth stocks, making them appealing to more risk-averse investors.
• You want to buy stocks that are priced below their actual worth. With value stocks, you’re looking for bargains—companies that are selling for less than what they’re truly worth, offering you a built-in margin of safety.
• You’re willing to dig deep into a company’s financials. Identifying value stocks requires doing research and understanding the company's business fundamentals, so you need to be comfortable analyzing balance sheets and income statements.
• You understand the risk of "value traps" and can differentiate between a real bargain and a deteriorating business. It’s crucial to avoid companies that appear cheap but have serious long-term problems.

Building Your Rich Life: How to Choose the Right Stocks for You

There’s no universal blueprint for choosing the perfect stocks. It all comes down to your personal goals, time horizon, and comfort with risk. Here’s how to approach selecting stocks that fit your needs and lifestyle:

Ask yourself the right questions

• What is your time horizon? If you’re investing for the long haul—say, retirement that’s decades away—you’ve got room to take on more risk with growth stocks or small-caps. But if your goals are closer on the horizon, like a home purchase or college tuition, you’ll want to lean toward more stable options, such as large-cap or dividend-paying stocks.
• How much risk can you tolerate? Risk tolerance isn’t just about how old you are; it’s about how you react when the market drops. If volatility makes you sweat, prioritizing more conservative investments may help you stay the course. If you can ride out the swings without panic-selling, you might be better equipped to hold growth-focused positions for the long term.
• What are your income needs? If you’re relying on your portfolio to produce regular income, preferred shares or dividend stocks may serve you better. On the flip side, if you’re still in the wealth-building stage, growth stocks that reinvest profits can compound your gains over time.

Diversify to reduce risk

Picking individual stock winners might feel rewarding, but it’s a risky way to build long-term wealth, especially if you're unfamiliar with the sectors you're investing in. Instead, focus on building a well-rounded portfolio that spreads risk across different stock types, industries, and company sizes. Here are some diversified portfolio examples that show how this strategy works in action.

Diversification doesn’t mean you avoid risk altogether. It just helps you avoid betting your entire future on the success of a few picks. For newer investors, broad exposure through index funds or ETFs can be a great way to build confidence and stability while still participating in market growth.

Review and adjust as life changes

Your investments shouldn’t stay static forever. As your goals shift—whether it’s getting married, starting a family, switching careers, or approaching retirement—your portfolio should evolve with you. Set a reminder to check in at least once a year and rebalance if needed. You don’t have to micromanage, but a regular review keeps things aligned with your priorities.

Don’t overcomplicate it

Investing doesn’t need to be flashy or complicated. In fact, some of the most successful investors simply automate their contributions, stick to a plan, and ignore the noise. A basic, diversified portfolio that you consistently contribute to over time can do more for your long-term wealth than chasing hot stocks ever will. 

Start simple. Stay steady. Adjust as needed. That’s how you build a Rich Life.