Types of Stocks Explained: Common vs. Preferred, Large-Cap vs. Small-Cap
Stocks are usually grouped two ways: by the type of ownership they represent (common or preferred) and by the size of the company (large-cap, mid-cap, or small-cap). Common stock gives you voting rights and share price growth potential, while preferred stock pays fixed dividends but usually skips voting rights.
Once you understand these two ways of grouping stocks, you’ll be able to read almost any stock listing and know roughly what you’re looking at. Let’s go through each one.
Common Stock vs. Preferred Stock
Most people, when they say “buying stock,” mean common stock. But preferred stock exists too, and it works quite differently.
What Is Common Stock?
Common stock is the standard type of share most investors buy. When you own common stock, you own a piece of the company and usually get to vote on major company decisions, like electing the board of directors.
Common stockholders benefit when the company grows and the share price rises. Some common stocks also pay dividends, though this isn’t guaranteed and can be cut or stopped if the company needs the cash elsewhere.
The tradeoff is risk. If a company goes bankrupt, common stockholders are paid last, after creditors, bondholders, and preferred shareholders. In practice, this often means common shareholders receive little or nothing in a bankruptcy.
What Is Preferred Stock?
Preferred stock works more like a hybrid between a stock and a bond. Preferred shareholders typically receive a fixed dividend payment, similar to interest on a bond, and that payment usually has to be paid before any dividend goes to common shareholders.
In exchange for this more predictable income, preferred shareholders usually give up voting rights and have less potential for dramatic price growth compared to common stock.
Preferred stock is less common among individual retail investors and is more frequently used by larger institutional investors, though some brokers do offer access to it.
Common Stock vs. Preferred Stock: Side-by-Side Comparison
| Feature | Common Stock | Preferred Stock |
|---|---|---|
| Voting rights | Usually yes | Usually no |
| Dividend | Variable, not guaranteed | Fixed, paid first |
| Price growth potential | Higher | Lower |
| Priority if company fails | Paid last | Paid before common stock |
| Best suited for | Growth-focused investors | Income-focused investors |
Large-Cap, Mid-Cap, and Small-Cap Stocks
The second common way to categorize stocks is by market capitalization, often shortened to “market cap.” Market cap is the total value of a company’s shares, calculated by multiplying the share price by the number of shares outstanding.
What Is a Large-Cap Stock?
Large-cap stocks belong to well-established companies, generally valued at $10 billion or more. These are often household names that have been operating and growing for years or decades.
Large-cap stocks tend to be more stable than smaller companies. They usually have predictable revenue, established customer bases, and enough financial cushion to handle a rough quarter or year without collapsing. Growth tends to be steadier but slower.
What Is a Mid-Cap Stock?
Mid-cap stocks generally fall between $2 billion and $10 billion in market value. These companies have often moved past the early growth stage but haven’t reached the size and stability of large-cap firms.
Mid-caps can offer a middle ground: more growth potential than large-caps, with somewhat more stability than small-caps.
What Is a Small-Cap Stock?
Small-cap stocks typically fall under $2 billion in market value. These are often younger or niche companies still working to establish themselves in their market.
Small-cap stocks can grow quickly if the company succeeds, but they also carry more risk. Smaller companies often have less cash reserved, fewer resources to weather downturns, and share prices that can swing sharply on relatively small pieces of news.
Large-Cap vs. Mid-Cap vs. Small-Cap: Comparison Table
| Category | Typical Market Value | Growth Potential | Stability | Risk Level |
|---|---|---|---|---|
| Large-cap | $10 billion or more | Lower to moderate | Higher | Lower |
| Mid-cap | $2 billion to $10 billion | Moderate to high | Moderate | Moderate |
| Small-cap | Under $2 billion | Higher | Lower | Higher |
These are general guidelines, not fixed rules. The exact dollar thresholds can shift slightly depending on the source and the country’s market.
Growth Stocks vs. Value Stocks
Beyond ownership type and company size, investors also talk about growth and value stocks, another useful distinction for beginners to know.
- Growth stocks belong to companies expected to grow revenue and earnings faster than average. They often reinvest profits instead of paying dividends, and their share prices can be more volatile.
- Value stocks are shares that appear to trade below what the company might reasonably be worth, based on measures like earnings or assets. Investors buying value stocks are often betting the market will eventually recognize that worth.
Neither approach is automatically better. Many beginner investors hold a mix of both types across different companies and industries, rather than betting heavily on just one style.
Which Type of Stock Should Beginners Consider?
There’s no single right answer, but a few patterns are common among new investors.
- Beginners looking for steadier footing while learning often start with large-cap common stock in familiar companies or industries.
- Those wanting more predictable income sometimes explore dividend-paying stocks or, less commonly for retail investors, preferred shares.
- Investors comfortable with more risk in exchange for higher growth potential may look at small-cap or growth-oriented stocks, usually as a smaller portion of a broader portfolio.
In practice, many people find it easier to diversify across company sizes and stock types using an index fund or exchange-traded fund rather than picking individual stocks one by one, especially in the first year or two of investing.
Key Takeaways
- Common stock offers voting rights and higher growth potential, while preferred stock offers fixed dividends but usually no voting rights.
- Market capitalization sorts stocks into large-cap, mid-cap, and small-cap, based on the total value of outstanding shares.
- Large-cap stocks tend to be more stable, while small-cap stocks carry more risk and higher growth potential.
- Growth and value are two additional investing styles, based on how a company’s future potential compares to its current price.
- Many beginners diversify across multiple stock types rather than concentrating in just one category.
Frequently Asked Questions
Is common stock or preferred stock better for beginners?
Common stock is generally more accessible and familiar for beginners, since most retail brokers focus on it and it offers a stake in the company’s growth. Preferred stock can suit investors more focused on steady income.
What counts as a large-cap company?
There’s no single official cutoff, but large-cap generally refers to companies valued at $10 billion or more in total market capitalization.
Are small-cap stocks riskier than large-cap stocks?
Generally yes. Small-cap companies often have less financial cushion and can see sharper price swings, though they can also offer more room for growth.
Can a stock be both a growth stock and a small-cap stock?
Yes, these categories aren’t mutually exclusive. A stock can be small-cap by size and also growth-oriented by strategy, and many small-cap companies do fall into the growth category.
Do all stocks pay dividends?
No. Many companies, especially younger or growth-focused ones, reinvest profits back into the business instead of paying shareholders a dividend.
