There are nine different types of stocks that you, whether you’re an investing beginner or an expert, need to keep in mind so that you can create investment strategies that are unique to your risk tolerance and financial goals.
Some of these types of stocks actually fall into a larger category, but it’s important that you know all the different kinds so that you get into your investments with the right expectations in mind.
Keep in mind that the blog is talking about different types of common stocks and not unlisted or preferred stocks.
Common stocks are the ones that are the most appealing to investors, and those are the ones you’ve probably heard about the most because they offer the widest range of opportunities, from capital gains to growth to income.
A lot of people, when they get started in investing, think that investing is all about picking a random stock and then waiting on it for 20 years so that you can take profit.
On the flip side, some beginners confuse investing with day trading or swing trading. They want to buy stock today and book the profits tomorrow. If you’re looking to become a professional day trader or a scalper, then this is not the right place.
But if you’re looking to make your money grow and create passive income and generational wealth, then you are in the right place because today, we’re going to talk about the nine different types of stocks, their advantages and disadvantages, and what type of investor should invest in each category.
Types of Stocks
These nine categories of stocks are not taken from any book, guru, or mentor but created by personal experience.
There are hundreds of categories in which you can classify a stock using different classifications, so do not think of it as a definitive list. Any list is not definitive, for that matter.
So with that out of the way, let’s begin with our list of nine different types of stocks and who should buy them.
1. Blue Chip Stocks
These are the stocks that have the most predictable earnings and dividend payments. They have steady growth, low volatility and generally trade at a higher price.
Basically, these are the biggest companies in the country that are termed “too big to fail.” Examples in 2021 are AbbVie (ABBV), Johnson & Johnson (JNJ), and 3M (MMM). Some older examples include Nike, Procter & Gamble, IBM, McDonald’s, Boeing, Intel.
Blue-chip companies are cash-rich, have a huge market cap, and offers decent dividend yield. They are generally considered to be a safe investment that can keep your money safe even during recessions and market downturns.
However, it doesn’t mean that blue-chip stocks are invincible. Lehman Brothers, Nokia, Blackberry, Kodak, Blockbuster were all once considered to be blue-chip stocks, but you know where they’re now.
investors who want to earn higher returns than bonds and other debt instruments without taking too much risk can get into blue-chip stocks.
Also, investors who want to balance their portfolio with low-risk investments can consider getting into one or two blue-chip companies. To be honest, blue-chip stocks are a fit for almost any type of investor because who doesn’t want them, huh?
2. Income Stocks
If your risk tolerance is anywhere between medium to low, and you don’t really care about growth, while all you care about is only dividend payments because you’re looking for that additional income, then you might want to look into income stocks.
Income stocks are the type of stocks that don’t generally grow as much, but they are known for paying higher than average dividend payments.
These stocks also generally consist of cash-rich and well-established companies that are unlikely to cut their dividend payments anytime sooner.
Examples of income stocks include American Electric Power, Duke Energy, General Mills, Altria Group, etc.
Now, the downside with these kinds of stocks is that probably the reason why they’re paying such a high dividend is because they want investors to invest in them and hold their shares. After all, they want to remain attractive to counter their lack of growth.
Also, while income stocks are considered to be a safe investment, some of these stocks in the past have cut their dividend payments because they went under.
Also Read: Stock Market Crash Study From 1929 to 2020
3. Growth Stocks
These are the type of stocks that experience higher than average earnings and sales, and they pay little to no dividend at all because the people who invest in such stocks do so because of the high growth potential.
Some examples include Amazon, Nvidia, Apple, Micron, Lockheed Martin, AMD, and Google.
Now, while these companies are high growth and can reward you with good returns, they come with a higher risk because of the volatility present in them.
Growth stocks are suitable for generally younger investors, and those who can wait out the growth while risking more of their capital.
People looking for attractive capital gains rather than dividend payments, and are ready to take a little more risk can opt for growth stocks in their portfolio.
4. Tech Stocks
The next on the list are tech stocks. These are some of the hottest stocks since 2018 because they represent the technology industry, which is, without a doubt, the future.
Tech stocks include companies in the fields of Artificial Intelligence (AI), Big Data, Semiconductor, Blockchain, and software.
Basically, everything that is probably going to completely change our culture, how we operate, how companies operate, and our workforce.
Tech stocks overlap with growth stocks because obviously they’re high growth, and consist of companies like Cisco, Microsoft, Google, Nvidia, AMD, Salesforce, Cloudera, Micron, etc.
These stocks are also high-risk, just like growth stocks, so they might not be a good fit for people with a low-risk tolerance, or older people who can’t wait for them to grow.
5. Speculative Stocks
Speculative stocks are something that a lot of traditional investors are not a fan of. These are the stocks with high P.E., little to no earnings, high risk but offer the potential for substantial price appreciation.
As the name suggests, the price of these types of stocks moves on the basis of speculation and hype in the market.
When you’re looking for speculative stocks, you’re basically looking at their management team, looking if they have a competitive advantage or have a promising new product.
Tesla was once a speculative stock that paid off big to its early investors. Bitcoin was also one such speculative asset that went big.
But while they both are successful examples, there are countless examples where these speculative investments have crashed and burned. That’s why one has to be very cautious while investing in them.
Sirius XM Radio, Dreamworks Animation, Plug Power Inc., Under Armour, PetMed Express are some current examples of speculative stocks.
6. Cyclical Stocks
Cyclical stocks move with the business cycle. Their earnings and overall market performance are closely linked to the general state of the economy.
They are medium to high-risk investments, and they are generally suitable for people and investors who can get in and out of stocks a little bit more often.
Keep in mind that holding a stock for less than a year is going to put you in a higher tax bracket if you are in the US. So until you’re making enough profit, it doesn’t make sense to do so.
Some examples of cyclical stocks are Alcoa, Caterpillar Inc., Genuine Parts, Lennar, Timken, and other such companies.
7. Defensive Stocks
Next up on the list are the defensive type of stocks. These are the stocks that tend to hold their own and sometimes do well even when the economy starts to fall and the business cycle starts to alter.
These are kind of counter to cyclical stocks, and it includes categories such as public utilities, industrial, consumer goods companies, producing beverages, foods, and drugs at a lower price.
A good example of defensive stocks is Walmart. These stocks are for investors who are aggressive and tend to just park their funds temporarily in a defensive stock while the economy remains soft.
You can also consider defensive stocks as a hedge against market slowdowns and even use them to balance your tech-heavy or growth portfolio.
8. Small-Cap Stocks
Small-cap stocks are stocks with a market capitalization of less than $1-$2 billion and may offer an above average return.
These are companies that are less known and not established, making them one of the riskiest investment types in the market.
Also, some of these companies have so few shares outstanding that it’s easy to move their prices, making them extremely volatile.
If you’re getting into small-cap stocks, you need to do a lot of homework regarding companies’ fundamentals, management, product, and services.
GameStop, Cassava Sciences Inc., Aurora Cannabis, BJ’s Wholesale Club, Invesco are all considered small-cap companies.
9. Mid-Cap Stocks
Mid-cap stocks or Medium cap stocks are generally those companies with a market capitalization of $1 billion to $10 billion.
Some current examples of mid-cap stocks are Morningstar Inc., Crocs, Timken, Aaron’s, Chemed, Allakos, while older examples include Dick’s Sporting Goods, William-Sonoma and Hasbro.
The advantage of medium-cap stocks is that they offer a nice alternative to large-cap stocks without the uncertainties of the small-cap stocks.
They’re in between large and small-cap stocks, and thus, they are the best choice for people with medium risk tolerance.
However, the disadvantage of mid-caps could be that they may be more volatile than large-cap stocks.
So, those were the 9 different types of stocks, their merits and demerits, and who should invest in them. If you’re interested in learning more about how to create an investment strategy specific to your own financial goals, then click the button below. 👇