To make sure you have all the required knowledge to make the most of our Stock Types course.
This lesson will help you understand how we classify different types of stocks, and what those specific types are. Let’s get started.
What are stock types?
Stock types refer to different classifications of stocks. There are many ways you can classify stocks, and since the term “stock types” is so general our course will show you the different ways that stocks can be broken down into groups. This will show you how you can compare stocks in a variety of different ways, depending on what you’re looking for when investing.
Why do investors need to know about stock types?
Because there are so many different stocks to choose from. To give you an idea of what we mean, the London Stock Exchange includes about 2,600 different stocks, while the New York Stock Exchange includes about 2,800. By breaking stock types down into smaller subgroups, investors can more easily compare different stocks, then make informed decisions on which ones to buy and which ones to avoid.
What are the different groups of stock types?
We break different types of stocks down into five different groups to help give an easier way to compare stocks to each other. Here’s a quick summary of them.
1) The Investment Strategy Group
The first way to group stocks is to think of how different stocks fit into different investment strategies. If you’re looking for the biggest gains possible over the long haul (albeit with potentially higher levels of risk), growth stocks could be for you. If you’re looking for stocks that deliver guaranteed returns every quarter (regardless of whether the value of the shares themselves have gone up or down), check out dividend stocks. If you want to hunt for bargains, you’re a good candidate for value stocks.
2) The Size Group
Stocks can be separated into three groups based on their size, as measured by market capitalisation. A market cap of $2 billion or less denotes a small-cap stock, a market cap of $2 billion to $10 billion refers to a mid-cap stock, and a market cap higher than $10 billion is found in large-cap stocks. Smaller-cap stocks tend to offer more potential for fast growth but also more volatility, while larger-cap stocks tend to offer more stability but less room to grow.
3) The Market Conditions Group
The stocks in this group tend to behave in specific ways related to the broad movement of the markets. Unless you’re planning to buy a stock, then forget about it for 30 years, the state of the stock market and the economy as a whole can (and should) affect the type of stock you buy. Cyclical stocks such as those of airlines, retailers, and car markers tend to perform best when the economy and stock market are performing well. Defensive stocks such as utilities tend to perform best when the economy and stock market are struggling, because people will always need water and electricity in their homes, in good times and bad.
4) The Quality Group
Another way that your goals as an investor will dictate the types of stocks you choose is how much you value quality and track record. A blue-chip stock will have delivered steady profits and stock gains for decades, and can thus offer a level of security to investors who simply want to buy and hold. Conversely, penny stocks fall well short in terms of track record and reputation, but can be enticing in their own right given the potential windfall you can make if they appreciate in price by just a few cents per share.
5) The Sector Group
If you want to drill down further, you can pick your stock type based on different sectors of the economy. An investment in a fast-growing technology stock will be geared toward innovation and long-term potential. An investment in a retail stock will be based on optimism for consumer demand. An investment in a healthcare stock will be based on your belief in the potential of a specific healthcare company to grow and expand in the future. Some investors are drawn to certain sectors and prefer to avoid others.
These are just basic summaries of the ways in which you can group stocks when crafting your investment strategy. We’ll go into all these areas in far more detail throughout our Stock Types course.
Here are some examples
To give you a more concrete idea of what the stocks in each of these groupings look like, here are some examples of stocks in the different groups.
1) Investment Strategy Stock Examples
As we said above, the three main kinds of stocks when considering investment strategy are growth stocks, dividend stocks, and value stock. Powered by wildly popular products and services, stellar earnings growth, and huge price gains that have led to a market cap topping $2 trillion, Apple (AAPL) is the quintessential growth stock. 3M (MMM) is a multinational conglomerate with annual revenue around $33 billion and a dividend yield of 3.6%, making it a well-known choice for dividend stock-seeking investors. Home builder Pulte Group (PHM) has rallied impressively from its March 2020 lows, but remains a value stock by virtue of its steady earnings growth and a price-to-earnings ratio that’s still modest at about 10-to-1.
2) Size Stock Examples
When looking at size, you can choose between small-cap, mid-cap, and large-cap stocks. With a market capitalisation around $500 million and a stock price that rocketed more than 10-fold from its March 2020 low to its August 2020 high, CarParts.com (PRTS) fits the mold of a fast-moving small-cap stock. British home furnishings retailer Dunelm (DNLM) is a mid-cap stock that’s flourished in the past few months thanks to consumers’ move toward online shopping, running its market cap up to nearly £3 billion. Tesla (TSLA) has been a high-flyer in 2020, with the electric car giant’s stock soaring about sevenfold in less than six months, reaching a market cap near $400 billion as of early September 2020.
3) Market Conditions Stock Examples
When markets are performing well, cyclical stocks are great investments, but investors tend to move to defensive stocks when things get rocky. As a cyclical stock that’s highly sensitive to broader economic conditions, American Airlines Group (AAL) got hammered as the global coronavirus pandemic took hold earlier this year; the stock could rebound if air travel bounces back as COVID-19 begins to subside, but the future is far from certain. As a company that specialises in mining gold and other precious metals, Barrick Gold (GOLD) is a quintessential defensive stock, since gold increases in demand during times of market uncertainty.
4) Quality Stock Examples
There are investment opportunities to be found on both the blue-chip and penny stock ends of the spectrum. With almost unparalleled brand-name recognition, nearly 40 years as a leading software developer, and consistently strong fundamental growth, Microsoft (MSFT) checks all the boxes of being a blue-chip stock. On the penny stock front, Curis (CRIS) is a biotech company working on finding treatments for cancer, giving the stock upside in terms of both its product line and its current share price (95 cents per share as of early September 2020).
5) Sector Stock Examples
Each example of a sector can cover a very wide range of companies, so ideally you’ll want to find some of the strongest stocks within each sector based on factors such as earnings growth and price strength. In the world of technology that’s a stock like Internet services titan (and Google parent company) Alphabet (GOOGL). For retail, that’s a stock like home improvement chain Lowe’s (LOW), and for healthcare there are companies such as biopharmaceutical giant Amgen (AMGN) to consider.
How do I find stock types?
We profile numerous stocks by different stock types every month right here on this site, so you can find everything you need right here.
This introduction should have helped you form a clearer understanding of the types of stock you can buy, and hopefully given you some ideas in terms of how to narrow down your search. The next five lessons will go into more detail about each of these individual stock types, so you can keep gaining investment knowledge and make smarter decisions.