It is common for companies to hold different classes of shares, each of which gives its shareholders voting rights and other rights, such as dividends or capital stock.To take the right steps to become an experienced investor, you need to understand that there are many different shares you can invest in.
Wondering what share to invest? What are different shares? When a company wants to raise capital to grow its business or meet its operational needs, it has two options. It is to borrow money or issue shares that give investors partial ownership of a company. A share is the smallest unit of company stock that represents the company’s percentage of ownership.
This guide is dedicated to the different types of shares classes. This is a comprehensive article that will cover all different types of shares. By the end of this guide, you will get to know about all the shares and you can decide in which share to invest.
How many types of shares are in the market?
A huge variety of shares are present in the market for trading and investment.It is common for companies to hold different classes of shares including blue-chip shares, penny stocks, oil stocks, cannabis shares, and dividend shares. So it is necessary to know the basic difference between all these shares to build a profitable portfolio. Let’s start discussing all the shares one by one-
Also Read: Best Stock Trading Apps to trade in UK
Blue Chip Stocks
First-class stocks are great companies with a good reputation. Blue Chip shares are the stocks of those companies who are established in the market for many years and also have a large volume of market capitalization. Blue Chip stocks are the stocks of financially sound companies that are doing extremely well in the market. Top-end stocks typically have multi billion-dollar market capitalization, are usually market leaders or one of the top three companies in their industry, and are usually pseudonyms.
There is a good reason why the term “top-tier stocks” is widely used in the global investment arena. Simply put, this particular stock term refers to a well-established, strong, and market-leading company in its industry. These are stocks that are considered “the cream of agriculture”. Mainly because it has proven over and over again that it persists regardless of how the economy develops.
Shares of Amazon, Apple, Ford, Nike, GlaxoSmithKline, and Vodafone are the top Blue Chip shares in the UK market. It cannot be said that there are any fixed criteria to decide Blue Chip shares as FTSE-100 companies also claim to have top stocks of the market.
Top shares companies consistently provide a dividend to the investors. The dividend of these shares also increasing every year. These companies are present in the market for more than a decade. If you look at financial stocks, most top-tier stocks have very strong balance sheets and good free cash flow. This, in turn, fully prepares you for a market correction. Some blue-chip stocks operate in “core industries,” meaning that no matter how the economy moves, there will be demand for those products and services.
A dividend stock is a stock where the dividend is paid to shareholders in shares in place of cash. Dividend stock decreases the earning per share for the investors but it is used to reward the shareholders without disturbing the cash balance of the company.These share distributions are usually made in fractions paid per existing share. For example, a company could issue a 5% dividend stock, issuing 0.05 shares for each share held by existing shareholders, giving owners of 100 shares an additional 5 shares.
BP is one of the largest dividend stocks on the FTSE 100 because the most recent dividend of this stock was just over 10%. While this may not seem like a huge amount, you should also consider the consequences of capital gains. Here, your share value will be higher than the amount you originally paid. Therefore, dividend stocks are one of the most popular stock types as you can profit in two ways.
Dividend stocks are tax conducive to investors. As with other stocks, dividend stocks are not taxed until the investor sells out these stocks, these stocks can be withdrawn after the company permits to withdraw the dividend in cash.A dividend stock may require that the newly received stock not be sold for some time. This dividend stock holding period usually begins the day after the purchase.
FTSE 100 Shares
The FTSE 100 Index was set up on January 3, 1984. The FTSE 100 comprises the top 100 Companies of the UK that have large market value. However, as many of these companies are internationally oriented, the index movement is a rather weak indicator of UK economic development and is strongly influenced by the British pound exchange rate. FTSE 250 index is one of the best indicators of the UK. This is because the index includes a smaller percentage of international companies.
All FTSE-100 companies have a market cap in the billions of pounds (excluding NMC Health PLC), so most of them are large, stable, and well-established stocks. Of course, there are a few exceptions. However, FTSE includes the UK’s top 100 PLCs, so invest in quality stocks. Additionally, the majority of FTSE 100 shares pay dividends, an additional bonus.
Many UK investors generally invest in an ETF or mutual fund that follows the FTSE 100 index. This allows you to buy shares of each FTSE 100 stock in a single investment. This eliminates time-consuming research and analysis of individual companies. Also, and perhaps most importantly, you are still entitled to dividends.
Top FTSE 100 ETFs are-
- iShares Core FTSE 100 UCITS ETF
- Vanguard FTSE 100 UCITS ETF
- HSBC FTSE 100 UCITS ETF GBP
- Xtrackers FTSE 100
- UBS ETF FTSE 100
AIM is set up to comprise those companies that are not big enough to be listed on the London Stock Exchange but these are those many goods that can be used for investment. For the most part, AIM stock is still in its infancy, so it’s a related company with a much smaller market capitalization.
Although it is not as volatile or illiquid as penny stocks, the risks involved are far greater than for companies on the London Stock Exchange. That said, AIM stock is popular with investors looking to acquire the company while it is still young.
If you are considering adding AIM stocks to your stock portfolio, there are a few important things to keep in mind. In the UK market, there are only a few reliable brokers are available that can be trusted.So, you should spend some time researching a suitable stock trading account before it plummets. Second, it is best to reserve a very small portion of your portfolio for AIM stocks as the risk/reward ratio is much higher compared to FTSE stocks.
Penny stocks are often sought after by people with a much higher tolerance for risk. This is because penny stocks usually refer to small businesses that are capitalized in the micro-market. Penny stocks are not traded on traditional exchanges like London Stock Exchange while these are available over-the-counter (OTC) sell.
Penny stocks are the shares of the small companies that usually value the share below $5 per share. Some of the penny shares can be traded on major stock exchanges like the New York Stock Exchange (NYSE), but mostly these are available over the counter (OTC) through the OTC bulletin board (OTCBB). OTC trading does not have a trading floor. Offers are also generated electronically.
There are several risks are associated with penny stocks but these shares also reward good returns. That said, it is not uncommon for a penny to increase in value by more than 1,000%. But only a handful of penny stocks achieve this feat. Investing in penny stocks is more likely to decrease the value of the investment. So, if you decide to invest in penny investments, keep your bets to a minimum.
Few characteristics of the penny stocks-
- Often, you will find that penny stocks are very volatile due to their low trading volume.
- Liquidity is also low, which can be a problem when selling penny stocks.
- The rules for penny stocks are not that much good if we compare them with traditional stocks.
- Often little information is available about individual penny stocks, which can make independent research difficult.
The cannabis market has become the fastest-growing market in the world with £1 billion in market volume each year. The reason behind this growth is the relaxation given by the government in cannabis laws. The cannabis legal structure can be divided into two main divisions- medical cannabis and recreational cannabis. In the former case, consumers can now purchase cannabis with a prescription from a licensed doctor or healthcare professional.
If you’re looking to add cannabis shares to your portfolio then the value of your investment will depend on the recreational cannabis market.It is advised to not only focus on cannabis stocks while you should focus to diversify the portfolio.
Pharmaceutical shares are the shares of the companies that are accessing the pharmaceutical industry. It could be a large pharmaceutical company, research, and development company that focuses on a specific disease, or a company that makes x-ray machines for hospitals. In many cases, investors flock to pharmaceutical stocks to protect their portfolios from market downturns.
This is because pharmaceutical stocks are often in the domain of defensiveness. Simply put, defenders are less vulnerable to a stock market downturn because they are inherent in the products and services that consumers always demand, no matter how the economy operates.
Pharmaceutical stocks include the shares of the companies that are serving in the food and beverage, tobacco, and household goods sectors. However, not all pharmaceutical measures can be classified as protective measures. This may be because the pharmaceutical company is relatively small or has stakes in certain drugs that have not yet been tested. It is best to focus on large pharmaceutical stocks.This allows you to get your money back faster, especially since you can reinvest your dividends into other investment opportunities.
“Oil stock” is a term used to describe companies operating in the oil and gas industry. Simply put, you buy stocks in a publicly-traded company with the hope that they will increase in value in the future. A good example of this is BP, a British oil and gas power plant listed on the London Stock Exchange. Owning BP stock not only allows you to increase your money through capital gains but also gives you the right to receive dividends as soon as they are paid out.
Petroleum stocks provide exposure to the global petroleum industry. They will not “invest in oil” because this is not logistically feasible; in place of it, you are buying shares in a company that is directly involved in the oil and gas sector. Because these companies generate profit through the production and sale of oil, so it makes sense that there is stimulation between asset value and stock price.
Therefore, before investing in oil stocks, it is important to understand what can affect the value of the stock. Oil trades in a highly geopolitical environment so these current market events play a big role in deciding the value of the oil stocks.
For example, if OPEC decides to lower the value of oil to defend itself from market competition, it will boost production. This leads to an oversupply of crude oil, which reduces the market value. Also, if a large oil producer decides to stop supplying oil, the value of the oil should rise.
And there are global problems like the coronavirus pandemic that has stopped oil demand. The Brent crude index hit a low below $16 a barrel in early 2020. At that time the majority of oil companies were forced to sell oil below the set price. BP, for example, says it has an equilibrium price of $35 a barrel, which is why its holdings plummeted when the pandemic peaked.
Non-voting shares are the shares where shareholders don’t get voting rights. This means that the owner has the right to a portion of the capital, but cannot attend the general meeting. Sometimes company gives non-voting shares to its employees so that employees don’t exit from the company. This class of stock allows major shareholders to maintain control of the company by multiplying the number of shareholders.
Non-voting shares generally do not have voting rights or the right to attend general meetings. Typically, these shares are issued to employees so that they can be paid out as dividends to both parties for tax efficiency.
An undervalued stock is the share of the company whose stock prices are less than its “intrinsic value.” In other terms, if a share has a worth of 500pbut is currently traded at 250p on the London Stock Exchange then you are in the range of undervalued stocks.
The most successful investors must be adept at selecting undervalued stocks. Warren Buffett himself would read through financial reports one by one to find undervalued stocks because it is best to invest in undervalued shares at a good discount.
There are several ways to determine undervalued shares.You can estimate the value of shares by the Price Earning (P/E) ratio. The P/E ratio is used to compare the current price of a company’s stock to its earnings per share. The following indicators have the potential to tell, at least in theory, whether a stock is overvalued or undervalued.
If you can calculate the P/E ratio then what do you have to do after that? After the P/E ratio, you can do some averages to determine the value of the stock whether it is undervalued or overvalued. At the end of 2019, the average P/E of the FTSE 100 stock was 16. So anything less than that is a good indicator. However, it is important to consider the specific industry in which the stock in question operates.
Preferred shares give their holders a preference for fixed dividends this means dividends on these shares are paid before other shares. Priority is given to the preference shareholders at the time of bankruptcy.
Because this stock class has many advantages and guarantees, it is mainly issued to investors such as venture capitalists who invest in startups. However, preferred stock does not have the same property rights as common stock in the company. They are often not eligible to vote and can be exchanged from time to time. Redemption preferred stock is a common form of corporate financing. This allows the company to repurchase the stock in the future (for example, if interest rates fall and the company wants to issue new shares at lower dividends). Preference shares come with-
First, holding preferred stock allows you to receive a fixed dividend for the duration of the investment. In most cases, the company pays you indefinitely. There are some shares whose dividend sometimes fluctuates. In most cases, the exact rate of return is determined by the financial performance of your business. Ultimately, preference shares are useful when you want to know exactly how much you can earn from dividends each year.
There is no guarantee that the company you choose as common stock will pay dividends. This became very evident during the coronavirus pandemic when many FTSE-100 companies decided to suspend their dividend policies until further notice. The good news for you, preferred owners, is that you can continue to receive your fixed dividend even if you have a discontinuation agreement. They say “I can” because I have to hold a certain type of stock known as “cumulative preferred stock.”
Another important advantage as a preferred share is that it has a high level of claim to the company’s assets in case of the bankruptcy filing. In these unfortunate circumstances, creditors and employees often come first after that it is the number of preferred shareholders. Only then will ordinary shareholders receive a portion of the remaining assets. If you do, you will receive a fixed dividend, but will usually be paid retroactively when the company resumes its normal dividend policy.
Redeemable shares are shares that can be bought back by the company at a certain time. The redemption date can be set in advance (eg 3 years from the issuance date of the shares) or at the company’s discretion. The redemption price usually coincides with the issue price, but it doesn’t have to be.
Shares issued to employees can often be redeemed so that the company can get the shares back when the employee leaves the company. However, the possibilities for using units are limited and special legal requirements apply. For example, a company may only withdraw shares from retained earnings or the proceeds from the issuance of new shares.
Redeemable shares are issued on the condition that the company can repurchase them at a later date. This is set or determined at the discretion of the principal. Sometimes company gives non-voting shares to its employees so that employees don’t exit from the company.
Growth shares are the shares of the companies that have the potential to grow abundantly in the market and the share price of these Companies also increases high in the market. In other words, the company in question is “expected” to perform better in the broader market, not just those operating in the same sector or industry. There is no exact and fast rule of thumb for what constitutes a growth rate, but there are some important properties that remain constant.
Fraction share is not technically a separate share class while it is a different type of investment that is offered by the brokers. Investing in some stocks essentially means you can buy a lot of stocks and invest a smaller amount than others.
For example, on eToro, you want to invest $50 in shares, out of which you want to buy the shares of $40 of one company. Suppose you want to invest in Berkshire Hathaway and the share price of this company is $276,015 but you have only $50. But you can buy the fractional share of Berkshire Hathaway through eToro for $40.
Management shares give shareholders additional voting rights at company general meetings (eg 2 votes per share). These shares are often used to give company directors control of the company if the shares are issued to outside investors.
Alphabet share is a subclass of common stock that allows a company to change the rights associated with its shareholders. Although each class of stock may be given a descriptive name (eg, non-voting stock, preferred stock, or redeemable stock), it is common to indicate the stock class only by a letter (A, B, C, D, etc.) of the desired subgroup.) Constituting a company), each class has different voting rights, dividends, and capital.
Why are there different types of classes?
Different types of shares give shareholders different rights. Thus, different types of actions not only grant different permissions but also help to easily distinguish between these different permissions. Some of the more general rights companies want to distinguish include rights to:
- Attract investors
- Directing dividend returns in a specific direction
- Remove or increase voting rights of certain shareholders
- Motivate employees to stay with the company (eg, through employee engagement programs).
- Attend a general meeting
- Vote on company contract
- Dividend receipt
- Participation in capital distribution after company dissolution
Which platform is the best for buying shares?
After discussing the class of different shares the question arises that where to invest in these stocks. It is time to conclude by emphasizing the importance of choosing the right stockbroker. Finally, if you want to buy stocks, you must use a third-party stock trading platform, no matter what category you fall into.
With the growing popularity of the retail investment sector in the UK, there are hundreds of stockbrokers serving them. So many brokers are available in the market so it is difficult to select one. So it is important to analyze the authenticity and other features of the brokers before selecting one. So, before choosing a broker, there are a few key indicators to research.
- Are the stockbrokers regulated by the Financial Conduct Authority (FCA)?
- What are the stocks available on the broker’s site?
- What are broker’s fees and commission, and other charges?
- What are the payment methods available for deposits and withdrawal of the funds?
- Is this the right broker for first-time investors?
We recommend the eToro platform for investing in shares. eToro is the top stock broker these days.
If you’ve read the entire guide, we hope you now have a complete understanding of the different types of stocks you can buy. The bottom line is that there are multiple subsections for each type of behavior, so it’s important to differentiate yourself before diving in. If you want to start building your stock portfolio right away, we recommend using the recommended broker eToro. With over 800 stocks that you can purchase without commission, eToro has almost every type of stock you can think of.
If you’re looking out for some good shares then you can select the shares of the companies like Tesla, Upwork, Uber, and Netflix. If you’re more curious about strong and huge dividends then you choose the shares of the companies like GlaxoSmithKline and British American Tobacco.