With thousands of different stocks trading on the US and international securities markets, there are stocks to suit every investor and to complement every portfolio. For example, some stocks stress growth, while others provide income. Some stocks flourish during boom times, while others may help insulate your portfolio's value against turbulent or depressed markets. Some stocks are pricey, while others are comparatively inexpensive. And some stocks are inherently volatile, while others tend to be more stable in value.

Common vs. preferred

While most of the stock issued in the US is common stock, some companies also issue preferred stock.

If you buy common stocks, you share directly in the success or failure of the company. If the company grows or realizes a profit, your income from the stock may increase, or the share price may climb. On the other hand, if the company has a disappointing year, your investment in the company will probably be disappointing as well. If the company goes bankrupt, you could lose your entire investment.

Preferred stocks reduce your risk — but also limit potential reward. The dividends paid on preferred stocks are fixed and guaranteed. You may even get some of your investment back if the company goes bankrupt. However, if the company grows or realizes a profit, your dividends stay the same and the share price increases more slowly than shares of the company's common stock.

Stocks in large, well-established companies that have a solid record of increasing profits and paying dividends are known as blue chips — after the most valuable poker chips. It's not an official designation, and the list does change from time to time.

Market capitalization

One of the main ways to categorize stocks is by their market capitalization, sometimes known as market value. Market capitalization (market cap) is calculated by multiplying a company's current stock price by the number of its existing shares. For example, a stock with a current market value of $30 a share and a hundred million shares of existing stock would have a market cap of $3 billion.

One size doesn't fit all

Stocks are usually designated large-cap, medium- or mid-cap, and small-cap. Some experts also add a special category of micro-caps, or stocks with even smaller market capitalizations.

In general, large-cap stocks tend to be less volatile than small-cap stocks. This is because small-cap stocks generally represent younger, less-established companies that do not have the financial resources of larger companies and are thus more vulnerable to a downturn in the economy.

As you might expect, mid-cap stocks can offer a middle ground between the growth potential of small-caps and the reduced volatility of large-caps. Mid-caps typically cost less than large-cap stocks and are less vulnerable in economic downturns than small-caps.

Performance cycles

Stocks of different sizes also tend to follow different performance cycles. For instance, smaller-cap stocks may go up in value at a time that large-cap stocks remain flat or go down, or vice versa. And following a period in which one category outperforms the others, the situation typically reverses.


Where to get information

Volume of trading

Speed of trading

Risks & rewards

(companies with capitalizations of more than $10 billion)

The Dow, S&P 500

Extensive media and brokerage attention



Comparatively high prices, though little risk of company failure

May pay dividends

Sometimes limited growth potential

(Companies with capitalizations between $2 and $10 billion)

Mid-cap indexes

Some media and brokerage attention



Potential for growth greater than for larger companies, but so is the risk for loss

(Companies with capitalizations of less than $2 billion)

Russell 2000 index

Limited media coverage attention

Potentially small

Potentially slow

Big gains possible

Higher risk from company failure or poor management

Growth & income

Some stocks are considered growth investments, while others are considered value investments. From an investing perspective, the best evidence of growth is an increasing price over time. Stocks of companies that reinvest their earnings rather than paying them out as dividends are often considered potential growth investments. So are stocks of young, quickly expanding companies.

Value stocks, in contrast, are the stocks of companies that have financial problems, have been underperforming their potential, or are out of favor with investors. As a result, their prices tend to be lower than seems justified, though they may still be paying dividends. Investors who seek out value stocks expect them to stage a comeback.

Income stocks

While most people invest in stocks for growth, some stocks — especially those of large, well-established companies, such as some of the blue chips — provide income in the form of dividends. Stocks that pay dividends regularly are considered income stocks

P/E ratio

A popular indicator of a stock's growth potential is its price-to-earnings ratio, or P/E. Calculated by dividing a stock's current price by its earnings per share, the P/E — or multiple — can help you gauge the price of a stock in relation to its earnings. For instance, a stock with a P/E of 15 is trading at a price 15 times higher than its earnings.

A low P/E may be a sign that a company is a poor investment risk and that its earnings are down. But it may also indicate that a company is undervalued by the market because its stock price doesn't reflect its earnings potential. Similarly, a stock with a high P/E may live up to investor expectations of continuing growth, or it may be overvalued.

Debt problems

While the P/E ratio can help you evaluate the cost of a stock, it's not the only factor to consider. You'll also want to look at the price and earnings in relation to the company's net asset value, or book value — its net assets divided by the number of its shares and bonds in the market. This information, which you can find in analysts' research reports, or in the company's 10-K or annual report, can help you gauge how much debt a company is carrying. Too much debt can limit potential growth.

Defensive vs. cyclical

Another factor in stock performance is how closely a company's business success is tied to the condition of the economy. Defensive stocks, in industries such as utilities, drugs, healthcare, and food, are often more resilient in recessions and stock market slides — at least theoretically — because product demand continues. Many investors include them in their portfolios to offset more volatile stock investments.

Cyclical stocks, on the other hand, may flourish in good times and suffer when the economy dips. Airlines, for example, tend to lose money when business and pleasure travel are cut back. When the economy slows down, cyclical stock prices typically fall, because company earnings are down as well. But when the economy recovers, the cycle may work in your favor: Earnings will probably rise and the stock price will go up.