Ordinary and Preference Shares
Not all shares are the same. The most common type is the ordinary share (called "common stock" in the United States): it carries voting rights and a residual claim on earnings after all other obligations are met. Ordinary shareholders are last in line in a liquidation but fully participate in the upside when a business thrives.
Preference shares (preferred stock) occupy a middle ground between equity and debt. They typically pay a fixed dividend before ordinary shareholders receive anything, and they rank above ordinary shareholders in a liquidation. In exchange, preference shareholders usually have no voting rights. Some preference shares are convertible — they can be exchanged for ordinary shares under defined conditions. Preference shares are more common in early-stage financing rounds than in listed markets.
Growth, Value, and Income Stocks
Equities are often categorised by their investment characteristics. Growth stocks are companies expected to increase revenues and earnings faster than the market average — technology companies are the archetypal example. They typically reinvest all earnings rather than paying dividends, and they trade at high price multiples because investors are paying for future growth.
Value stocks trade at low multiples relative to their earnings, book value, or cash flows — often because the market has become pessimistic about their prospects. Value investors believe these companies are mispriced relative to their intrinsic worth. Income stocks prioritise returning cash to shareholders through dividends and are favoured by investors who want regular income rather than capital appreciation.
Size: Large-Cap, Mid-Cap, and Small-Cap
Companies are also grouped by size. Large-cap companies (typically market caps above £10 billion) tend to be more stable, more liquid, and more widely followed by analysts. Small-cap companies are smaller, less liquid, and less covered — but historically have produced higher long-run returns. This size premium was documented empirically by Rolf Banz in a 1981 paper and later incorporated into the influential Fama-French three-factor model (1992). The explanation for the size premium remains debated: some argue it reflects genuine additional risk; others that it reflects illiquidity or neglect.
Developed and Emerging Markets
Equity markets are divided by geography and development. Developed markets — the US, UK, Europe, Japan, Australia — have mature legal systems, deep liquidity, and strong regulatory frameworks. Emerging markets — China, India, Brazil, South Africa — offer faster economic growth but carry additional risks: currency volatility, political instability, weaker shareholder protections, and lower liquidity.
Investors can access foreign equities directly or through American Depositary Receipts (ADRs), certificates issued by US banks that represent ownership in a foreign company's shares. ADRs trade on US exchanges and simplify currency and custody arrangements for American investors.
Exchanges vs OTC Markets
Most large companies trade on regulated stock exchanges — formal markets with listing requirements, transparency rules, and central clearing. Smaller companies and certain securities trade over-the-counter (OTC): directly between buyers and sellers (or through dealer networks) without a central exchange. OTC markets are less transparent and typically less liquid.
How Indices Are Constructed
Stock market indices — the S&P 500, FTSE 100, MSCI World — are designed to represent segments of the market. Most major indices use float-adjusted market capitalisation weighting: each company's weight in the index reflects its market cap, excluding shares held by insiders or governments (the "free float"). This means the largest companies dominate — the top ten S&P 500 constituents regularly account for more than 30% of its total weight. Index composition changes periodically as companies grow, shrink, merge, or list for the first time.