Stocks is one of the most interesting, lucrative and equally risky form of investment. Investors buy stocks with the hope of gaining good returns. Many likes of Warren Buffet has even made billions only through trading while many also have witnessed bitter experiences while investing in stocks. Careful understanding of stocks is thus mandatory before going into the market as there are many different types of stocks which have their own benefits and disadvantages as well.
Income Stocks
An income stock is an equity security that offer high yield that may generate from the majority of security’s overall returns. It is very popular type of stock among investors since it is least volatile among all and offers higher-than-market dividend yield to its investors.
Income stocks are usually issued by large and well-established organizations that possess impressive track record of managing their business operations and finances. Moreover, whenever a large organization made some profit then most of its part goes to the investors instead of reinvested into the company. This is why many of the income stocks are considered as ‘Blue Chip’ stocks as it provides a consistent, fairly reliable and handsome dividend to investors.
Incomes stocks can be found in any industry but it is usually available (most of the time) in traditionally stable sectors like real estate, energy sector, utilities, financial institutions and natural resources, food among more.
People who do not have regular source of income and want to earn money with low risk often find attraction in this type of stock. Older or retired people are one such category who invests heavily in income stocks. An ideal income stock have a very low volatility, dividend higher than prevailing 10-year treasury bond rates with a modest level of annual profit growth.
Penny Stocks
Among many different types of stocks, penny stocks are usually highly in demand and often catch the eyes of new investors. Penny stocks are usually issued by small companies especially start-ups to raise funds from the investors. This type of stock is usually illiquid that are traded at very low price, and issued by companies that have very low market capitalization.
In Indian trading market, penny stocks are usually traded below the price of Rs. 10 and in western markets, such stocks usually traded below $1 most of the time. Many also consider a stock priced under $5 as a penny stock. The benefit of investing in penny stock is that- it is available at low price and it has the potential to turn a ‘small investment’ into a ‘fortune.’ For example, if you purchase 50,000 shares of a penny stock at a price of $1 each then even a $1 rise in the share price can lead you to earn $50,000 in limited time. However, as people say that every good thing comes with some risk, here is also another side. Penny stocks are considered risky as it comes from companies which have very less number of shareholders, and discloses very limited information about their businesses. Moreover, such types of stocks are more prone to price manipulation and scams and do not end up making money for investors in most of the times.
Speculative Stocks
Stocks issued by companies that are developing new products, want to tap unexplored territory (often foreign markets), or have done major changes onto their management or financial level are considered as speculative stocks. Such stocks usually carry high risk as the company, product, and management often untested and many do not succeed in the long run but if such companies get succeeded then the return on investment can also be very high. It gives a promise of high return but the risk is also high.
Growth Stocks
In growth stocks, whenever a company earns any profit that money gets reinvested into the company itself to boost its innovation and business expansion. Investors do not get any dividends in this type of stock instead they receive capital gain whenever sell their stocks. As the company grows the prices of shares also get increases and the investor receives higher capital gain but when reverse happens, customers suffer losses as well. In this particular type under different types of stocks, usually, loyal customers who somehow trust a company, its product and management invest their money for the longer run. Small and large enterprises both issue growth stocks.
Cyclical Stocks
Stocks of those companies who offer luxury and discretionary goods and services are often considered as Cyclical Stocks.
Stocks of airlines, vehicle manufactures, hotels, restaurants, and clothing among more fall into this category. Performances of such stocks are interlinked with health of economy. When economy does well, prices of such stocks usually remain high and when it performs badly, values of stocks lose a substantial value. For e.g. when economy flourishes, people do come out of their homes and afford to invest in buying cars, homes, shop and travel so the prices go up. And when economic downturn starts, these discretionary expenses are the first one which any consumer cuts from his/her wallet. However, in many cases, prices of Cyclical Stocks increase when economy recovers after recession and even (many times) surpass its older value. Many of such stocks possess the bounce back capability (sometimes) and therefore, considered as favourite among many investors.
Value Stocks
Sometimes when a company have assets worth more than its stock price then that stock is considered as value stock. Such stocks are seen as undervalued stocks by the investors and believe that value of its shares will increase over the time as company started growing. And if the company does not do well, then losses can also happen.
Defensive Stocks
Food, fuel, and healthcare services among more are something which every human needs all the time. Even if recession starts, no one stops eating food, refilling fuel to empty tanks or avoid going to hospitals. Stocks of such vital services are considered as defensive stocks. These are often kept by the investors as emergency stock and holds a great value under the classification of different types of stocks.
Such stocks are almost immune to any economic downturn, profits or financial slumps. And its demand gets increases when economy gets worse.
Now-a-days, in the times of globalization and fierce competition among rivals, even a small unpleasant event creates a bad effect on the economy. It is thus the responsibility of the individual investor to understand the nitty-gritty of all types of stocks or even other forms of investments before coming to any conclusion; as investors’ smartness and wisdom is what matters at the end.
Ashwini Deshmukh
7 Categories of Stocks that Every Investor Should Know
