It is ideal for investors to diversify their portfolio to other types of investments in order to hedge against the risk of losing. Diversification is very essential because nobody can predict the market. There would always be a time when a given investment will experience some losses, thus investing in different securities can help safeguard a portfolio against the big impacts of losses. In order to build a diverse portfolio, an investor needs to understand the different types of stocks which he/she could invest in the process of diversification. Here are the most common types of stocks and their classifications:
- Common Stocks – This kind of stock constitutes the majority of stocks that most people can avail. Common stocks usually represent a claim for a portion of a company. One distinct quality of common stocks is the privilege of the owner to vote in the election of the board members who would oversee the major decisions made by the management.
- Preferred Stocks – As with the common stocks, preferred stocks also represent some degree of ownership in a company, however, they usually don’t come with the same voting rights. The edge of preferred stocks over common stocks is the guaranteed fixed dividend that the company pays the shareholders.
- Cyclical Stocks – This type of stock usually goes along economic cycles. They go up strongly when the economy is booming and declines when the economy falls. Most of these stocks are composed of luxury products which are commonly bought when investors feel very economically positive.
- Defensive Stocks – If cyclical stocks go along the economic cycle, defensive stocks are resistant to it, or sometimes may even profit from a negative trend. These stocks are usually safe from a declining economy because they are considered as necessities. They are not affected even if consumers and businesses cut back spending because they continue to flourish regardless of such events.
Read more about the fundamental difference between cyclical and defensive stocks.
- Blue-chip Stocks – This type of stock is composed of large, well-established companies that have a long history of stable earnings. Most of these companies are the biggest and well-known high quality businesses. These stocks are usually a bit costly, but they are considered the safest stocks to invest in. Because of their large size, there is usually no room for more growth. This result in steady stock prices, but it also means less risk for upsides.
- Income Stocks – These stocks are not invested for capital growth, but for steady cash flow. But unlike preferred stocks, these stocks usually grow continuously each year. They are composed of companies that have a high dividend yield, which usually starts at 5% and above.
- Growth Stocks – These stocks are composed of stocks from companies with profits that are increasing quickly. This increase is usually reflected in the rise in the stock’s price. Growth companies often opt to reinvest their earnings to further improve the company rather than giving them as dividend payouts. However, growth stocks are considered risky investments as they could fall quickly anytime.
- Value Stocks – These stocks are usually considered undervalued stocks. When doing an in depth analysis of the company, they are often seen as underpriced relative to their perceived true value. Over the last century, value stocks have consistently outperformed growth stocks over time. That is why a lot of investors work on analyzing companies in the search for value stocks that they could buy at discounted prices.
- Large-cap stocks – These stocks are composed of large companies that have little potential for growth. They are commonly invested in due to capital gains, but to maximize the possible profits, one needs to starts investing by buying these stocks at the bottom of the business cycle and selling them at the peak. Large-cap stocks are usually composed of companies that are worth more than $10 billion.
- Mid-cap stocks – This is where most types of stocks fall into category as they are composed of the top of the small-cap market up to the bottom of the large-cap market. Companies of this type usually range between $2 billion to $10 billion.
- Small-cap stocks – These are composed of small companies that have the biggest potential for capital growth. However, these stocks are also very risky as no one can tell whether they would actually grow or not. Companies of these types are priced between $250 million to $2 billion. Other companies below this price range are considered micro-cap or nano-cap depending on their overall size.
Stay updated on market news, trends, and tips by regularly visiting Trade12. It is a reputable online trading broker that offers tight spreads, flexible margins and high leverage. Read about Trade12 reviews to ensure you trust only the best. Register an account now and enjoy a wonderful trading experience!