Stocks are arguably the most interesting and profitable, albeit risky investment form. Investors purchase stocks hoping to obtain lucrative returns. If you are an aspiring investor and keep up with the vast stock market, you will be aware of Warren Buffet and other similar personalities. They made millions, if not billions of dollars by trading stocks. There are hundreds of other notable names who tried their hand at stock investing and gained sizeable returns in short periods.
That said, many people encountered massive losses while trading and investing. In most cases, these individuals failed because they did not have adequate knowledge about how the stock market worked. So, thorough knowledge is mandatory for anyone who wants to make it big in this landscape. If not, you can face tremendous financial losses and may not be able to recover them.
Learning about the different stock types is potentially the most important thing for aspiring and experienced investors. For those who do not know, each type of stock possesses different qualities, advantages, and disadvantages. Knowing what these pros and cons are will provide you a clear idea of the steps you should take to get the upper hand when trading or investing. Please continue reading to learn about some of the essential stock types and the aspects that make them special.
Income Stocks
Income stocks are an equity security offering incredibly high yield capable of generating most of the security’s returns. These stocks are quite popular among investors because of their low volatility, especially compared to other options. Furthermore, income stocks offer remarkably high profits, making them a go-to option for anyone entering the stock market.
Unlike other variants, people can only receive income stocks from well-recognized organizations possessing a blemish-free track record of handling their finances and business operations. Moreover, when these organizations generate profits, they go to investors rather than being reinvested. It is a significant reason why experts use the term ‘blue-chip’ to describe this stock as it provides a reliable and fairly consistent dividend to its investors.
You can find income stocks in almost every industry. However, they are mostly available in stable sectors such as food, natural resources, financial institutions, utilities, energy sector, real state, and several others. People without regular a regular income source often choose income stocks to earn money. Why? Because of its low risk and high returns.
Retired or older people, in particular, heavily invest in these stocks. The most favorable income stock offers low volatility with a modest growth of annual profits.
Growth Stocks
Unlike income stocks, companies reinvest the profit they generate through growth stocks to expand their business and boost their innovation. Investors do not receive any dividends for this stock type. Instead, they get capital gains.
What’s more, the shares’ prices increase side by side with the company’s growth, providing investors with higher capital gains. However, when the opposite happens, customers face terrible losses. In growth stocks, long-time customers who trust the company, its management, and products, invest their cash in the long run. Whether the enterprise is large or small, both of them issue these stocks.
Penny Stocks
Smaller companies mostly issue penny stocks. Start-ups, in particular, raise funds by obtaining money from various investors. Penny stocks are vastly different from the growth and income stocks because converting them into cash is quite complicated. Experts also use the term “illiquid” to describe this phenomenon. Because of penny stocks’ illiquidity, you can only trade them at low prices. Furthermore, you will usually find this stock type issued by companies with incredibly low market capitalization.
You will find penny stocks being traded below one dollar in western markets. However, people also consider stocks priced below five dollars as penny stocks. One of the best benefits of investing in this stock is its low price and potential to provide you with a massive fortune. For instance, if you buy fifty thousand penny stock shares for one dollar each, you could gain fifty thousand dollars or more after some wait.
Nevertheless, there are some risks involved too. It would even be fair to say that penny stocks are one of the most unsafe options in the market as most of them come from organizations with limited shareholders. Most of them steer clear from disclosing information concerning their business.
The lack of transparency can be troubling, especially for inexperienced investors. It is a significant reason some organizations manipulate these stocks’ prices and scam investors out of their hard-earned money. It would be best to remain vigilant when investing in penny stocks as a tiny misstep could lead to losses.
Speculative Stocks
Speculative stocks are unique in the sense that companies that issue them are usually making new products, trying to explore foreign markets and other untapped territories, or went through massive financial and managerial changes.
Similar to penny stocks, speculative stocks also carry risk. Why? Because the management, product, company, and new territories haven’t been through the tests, trials, and tribulations of experienced organizations. Most of them do not experience success, in the long run, meaning the returns, if things don’t work out, are quite low.
On the other hand, organizations can get an excellent return on investment if their changes are favorable. It would be fair to say that speculative stocks are a high risk, high return investment.
Value Stocks
Companies with assets worth higher that their stock prices are known as value stocks. Investors believe these stocks as undervalued, thinking their shares will drastically improve as the company grows. However, investors can face losses if the company does not perform well, making value stocks a risky option for up and comers in the stock market.
Cyclical Stocks
Cyclical stocks are the ones issued by companies providing discretionary and luxury services and goods. Clothing businesses, restaurant and hotel chains, vehicle manufacturers, airlines, and other similar operations fall into this grouping. Financial experts believe that performances of cyclical and other similar stocks are strong indicators of healthy economies. The value of these stocks mostly remains high when the economy is performing well, but it also loses its worth when things aren’t going well.
For instance, people invest in travel, shop, homes, cars, and other luxury items when the economy is flourishing. It positively impacts cyclical stocks and improves their value. However, the opposite happens when people cut their expenses on luxury goods and services. What’s most impressive about cyclical stocks is that they recover quickly and surpass their pre-recession value in some cases. More and more investors are choosing this stock due to its low volatility and superb returns.
Defensive Stocks
Defensive stocks provide stable dividends and consistent earnings despite their overall state in the stock market. There is never a shortage of demand for some essential products, which is why these stocks are possibly the most stable among the other options mentioned in this article.
Why would people want to buy a stock when things are becoming shaky and times are getting rough? Wouldn’t a treasury bull be safer because of its low risk? Sadly, greed and fear often dictate the markets. Defensive stocks provide a remarkably higher return than what you can make in environments with low-interest rates. Furthermore, these stocks also minimize fear and doubt as they are not as tricks as ordinary stocks.
Final Thoughts
Regardless of your experience, it would be best to consult with an experienced and reliable stockbroker when investing or trading any of the stock types mentioned above. It could save you from substantial losses and quite possibly provide high yields.
