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When a company is first set up, its co-founders and, if there are, other investors are the first people to own shares of this business. Subsequently, they could be sold for immediate income and cash or kept as a long-term investment and for receiving a dividend. According to what an investor desires to achieve, several different types of stock are to consider.
With the introduction of low fee platforms, stock investments have become more commonplace. In this chart using FED Survey of Consumer Finances data, it is clear to see that stock holdings are still dominated by the older age groups.
Under 35s account for an average of $27,000 in stock holdings, while those closer to retirement age and the retired hold over an average of $550,000. This suggests that stocks form an integral part of retirement planning.
What are they, their characteristics, and their investment opportunities? Which one should you consider investing in? We will deal with the following types: income, cyclical, blue-chips, tech, defensive, and growth stocks.
There are various types of stocks available in the market, each with its own characteristics and investment considerations. Here are nine different types of stocks:
1. Income/Dividend Stocks
As its name suggests, this security generates a steady and stable income through dividends. Experts consider them to have a low level of volatility and offer a high dividend payout ratio.
On the other hand, there are fewer opportunities to invest in. This type of stock can be found in large and stable companies, primarily in real estate, natural resources, and energy sectors.
Low volatility, regular dividend distribution during the last 10 to 15 years, and steady increases in dividend payout are all common characteristics of such equities, as is a pattern of increasing profit growth. Even though the dividend distribution of such stocks is consistently increasing, there is little room for future development of the cash invested.
For instance, company Z has generated 10 million USD in a year. The board of directors decides that the dividend they will pay their shareholders is 1 USD per share. This dividend is paid to investors regularly, which is part of their income. This is what makes this business an income stock. Here are some examples:
- Verizon Communications (NYSE: VZ)
- Microsoft (NASDAQ: MSFT)
- Kimberly-Clark Corp. (NYSE: KMB)
- Exxon Mobil Corporation (NYSE: XOM)
- Discover Financial Services (NYSE: DFS)
- Cisco Systems (NASDAQ: CSCO)
- AT&T (NYSE: T)
2. Cyclical Stocks
This is an equity stock that depends on a company's business cycles – ups and downs due to an economic crisis or boom.
Usually, these companies offer products such as cars, houses, and equipment – things people purchase when times are bountiful and cut back on during periods of economic recession. Investors in cyclical stocks profit when they buy the stocks during a crisis (the price is at its lowest) and sell them during an economic boom when the price is high. For example:
- Boeing (NYSE: BA)
- Delta Air Lines (NYSE: DAL)
- General Motors (GM)
- Norwegian Cruise Line Holdings (NYSE: NCLH)
However, remember that these stocks might become worthless if there is a severe economic recession. Typically, car manufacturers are a good example of cyclical stocks.
People usually buy food every day, but they think twice when they want to acquire a new car. Generally, a person would purchase a new automobile during economic prosperity. But, if the country is in a recession, this person would undoubtedly postpone this expense when the market recuperates.
3. Blue-Chip Stocks
These are stocks of large, financially stable companies that are usually one of the leaders in the respective industry. They have been on the market for a long time and their market cap is estimated to be billions. All this means that their shares' price cannot grow substantially because it's already high enough.
There are many examples in almost every sector, and as already mentioned these are one of the best performers:
- Amazon (AMZN)
- Coca-Cola (KO)
- Home Depot (HD)
- Microsoft (MSFT)
- Visa (V)
- Johnson & Johnson (JNJ)
In the USA, these corporations are listed on the Dow Jones Industrial Average index. Because of their high market value, their growth rate is limited, therefore investors primarily profit from dividends.
4. Defensive Stocks
It seems like the recession is close, and these are stocks that belong to corporations which are stable and solid performers and also resistant to the ups and downs of an economy. On the contrary, they can even make a profit during economic recessions.
For instance, during a financial crisis, most people cut back on their spending habits but cannot stop spending even if they wanted. While people avoid some expenses, they spend more on, usually cheaper, services and products:
- Lockheed Martin Corp (LMT)
- Charles Schwab Corp. (SCHW)
- Verizon Communications (VZ)
- T-Mobile US (TMUS)
- General Electric (GE)
- UnitedHealth Group (UNH)
5. Tech Stocks
Logically, these stocks belong to tech companies manufacturing different types of gadgets, devices, computers, equipment, etc. Some of these corporations, like Microsoft, are also blue-chips stock. Are they risky? Yes, definitely.
We all know how rapidly technology is changing. Basically, this happens on a daily basis. The new phone today is old tomorrow. The unpredictable results of technological research and the uncertain outcome of new products is a serious factor to think over. And here are some examples:
- Intel Corp. (NASDAQ: INTC)
- Apple (NASDAQ: AAPL)
- Facebook (NASDAQ: FB)
- Adobe (NASDAQ: ADBE)
- Dropbox (NASDAQ: DBX)
6. Speculative Stocks
Speculation is the keyword here. These are corporations that have little to no earnings and are very volatile. However, they are potentially lucrative because of their products, expansion on a new market, or even managerial changes promising a brighter future.
These stocks are extremely risky, simultaneously offering investors a very high return on their investment.
Some examples are companies dealing with online services and operating on the Net. They often boast innovative solutions and products with extremely high market caps, but their actual earnings are meager. They have more symbolic capital rather than real money. Perhaps this stock category is more for gamblers than investors.
To invest in such stocks, you need to have excellent risk-taking ability. If you are interested and willing to take the risk, you can invest some money in a few. You can buy these speculative stocks, for example, penny stocks, on Robinhood, TradeStation, Tradier, and various other trading platforms.
7. Growth Stocks
These are businesses that do not like to pay dividends to their shareholders. They would rather reinvest in their own company and projects than disburse dividends to investors. This practice guarantees higher profits and returns to the owners of a business.
Is there any risk associated with this type of stock? Yes, there is. If a company's growth expectations are not as anticipated, eventually, shareholders might lose money because the share prices will drop.
Having no dividends on your shares is another drawback associated with growth stocks. In a situation of a declining market, if an investor does not receive a dividend, the chances are high they would first sell their growth stocks. Logically, this will lead to declining share prices.
8. Penny Stocks
Penny stocks are typically low-priced stocks, often traded below $5 per share, and are often associated with smaller companies.
These stocks can be highly speculative and risky investments due to their potential lack of liquidity, limited regulatory oversight, and increased volatility.
It's important to note that investing in penny stocks carries significant risks, including liquidity challenges, limited information availability, and potential price manipulation.
Investors considering penny stocks should conduct thorough research, exercise caution, and be prepared for the higher level of volatility and speculative nature associated with these types of investments.
Here are examples of penny stocks:
- Aphria (TSX: APHA) (APHA)
- HempFusion Wellness (YCBD)
- Castor Maritime Inc. (CTRM)
- Genius Brands International Inc. (GNUS)
- Zomedica Corp. (ZOM)
- Gevo, Inc. (GEVO)
9. Small-Cap Stocks
Small-cap stocks refer to companies with a relatively small market capitalization. While there is no specific market capitalization range universally agreed upon, they generally fall between a few hundred million dollars to a few billion dollars.
Small-cap stocks are known for their potential for higher growth but also come with increased risk and volatility compared to larger, more established companies.
Here are examples of small-cap stocks:
- Etsy Inc. (ETSY)
- The Andersons, Inc. (ANDE)
- Green Dot Corporation (GDOT)
- At Home Group Inc. (HOME)
- The Simply Good Foods Company (SMPL)
- Brooks Automation, Inc. (BRKS)
Stock Volatility Impact Stock Type Classification
The most basic definition of volatility is a measure of how much a price moves. Highly volatile stocks have a price that varies widely, hitting new highs and lows or moving unpredictably. Low volatility refers to a stock that keeps a relatively constant price. A stock with a high level of volatility is inherently risky, but the risk is shared.
When you buy in a volatile investment, you improve your chances of success while also increasing your chances of failure. As a result, many traders with a high risk tolerance use numerous metrics of volatility to assist them plan their trades.
How to Estimate Stock Volatility?
The standard deviation is the most common metric of volatility used by traders and analysts. This metric measures how far a stock's price has deviated from the mean over a given period of time. It is derived by subtracting the mean price for the specified period from each price point. The variance is calculated by squaring, adding, and averaging the differences.
The variance is no longer in the original unit of measure because it is the product of squares. Because pricing is expressed in dollars, a metric based on dollars squared is difficult to comprehend. As a result, the standard deviation is determined by square rooting the variance, which returns it to the same unit of measure as the underlying data set.
Standard deviation measures are predicated on the assumption that returns are regularly distributed, which is the fundamental flaw in using standard deviation to determine volatility. More results cluster in the center of a normal distribution, often known as a bell curve, and fewer results are far above or below average.
While doing historical volatility calculations can assist build a picture of how much volatility to predict in the future, investors only have data from the past. Historical data can still be important since it helps indicate how the price of an asset will fluctuate in the future.
Yes, small-cap stocks tend to be more volatile than large-cap stocks due to their smaller size, limited resources, and sensitivity to market conditions. They can experience sharper price fluctuations.
Small-cap stocks have the potential for higher returns due to their growth prospects. However, it's important to note that higher returns come with increased risk, and not all small-cap stocks will perform well.
Penny stocks are highly speculative and come with increased risks. They often lack liquidity and are subject to limited regulatory oversight, making them a high-risk investment choice.
Diversification is prudent to manage risk. Including small-cap stocks can provide exposure to different sectors and potentially enhance overall portfolio performance.
Mid-cap stocks represent companies with a market capitalization between small-cap and large-cap stocks. They offer a balance of growth potential and stability compared to small-cap or large-cap stocks.