WHAT ARE THE TYPES OF STOCK IN TRADING?

Growth stocks

Growth stocks are the ones that make it into the news the most, as they tend to have the highest returns—though they are often very volatile too. These are the stocks of companies with rapid earnings growth of at least 20% a year.

Growth stocks can be profitable because they compound reinvested profits. If earnings grow rapidly, a stock price that seems expensive can look like a bargain two or three years later. Growth stocks are usually expensive, which is okay if the company continues to grow, but will probably result in losses if, or when, growth slows.

Well-known growth stocks include Amazon, Adobe, and Facebook.

Momentum stocks

Momentum stocks are those with rapidly appreciating share prices. In many cases, these stocks are also classified as growth stocks, but other factors can drive the share price besides earnings growth.

Stocks with an exciting story behind them can also appreciate rapidly even if the company isn’t profitable. Rumours of acquisitions and other stories can also drive a price higher.

Stocks with strong momentum over a 12-month period will often go on to outperform over the next 12 months. The risk is that when they don’t, they can quickly give back those gains. In 2019, popular momentum stocks have included Match Group, Mongo DB, and Snap.

Value stocks

Value stocks are considered to be trading at a low price relative to their fundamentals and intrinsic value. This provides a margin of safety for investors. Value stocks can still generate good returns over time as steady returns compound. In some cases, the stock price may rerate to a higher valuation, leading to excess returns.

Apple was a growth stock for many years but is now considered by many to be a value stock. The same goes for IBM, Dell, and many energy stocks.

Cyclical stocks

Cyclical stocks are highly correlated to business cycles. During periods of economic growth, their prices appreciate rapidly and then gains are given up during economic downturns. Investors can make considerable profits if they buy and sell these stocks at the right times. Cyclical stocks typically belong to the consumer discretionary, construction, mining, and energy industries.

Dividend or yield stocks

Dividend stocks are those that pay regular, above-average dividends. They are also known as yield stocks as they yield a regular pay out, much like bonds. Dividend stocks are typically those of companies that earn decent and reliable profits, but may not be growing quickly.

Dividend growth stocks pay smaller dividends but are growing their dividend substantially every year. The initial yield may be low, but after a few years, they can offer a substantial yield on the original purchase price.

The Dividend Aristocrats is a list of stocks that have increased their dividend every year for the last 25 years. The list includes Abbot Laboratories, AT&T, Coca Cola, and Walmart.

Defensive stocks

The stocks that are expected to lose the least value during a correction or bear market are regarded as defensive. In many ways, these are the opposite of cyclical stocks. These belong to companies that are less affected by business cycles.

Companies in the pharmaceutical, utility, and defence industries are less affected by consumer confidence or growth in consumer spending and have more reliable cash flows. Examples include Proctor and Gamble, Lockheed Martin, and American Water Works.

Blue chips

Companies with high-quality, reliable earnings are regarded as blue chips. The name comes from casinos where blue chips are the most valuable. These companies are typically very large, have well-known brands and are market leaders with strong profit margins. The Dow Jones Industrial Average is an index of 30 blue chip stocks and includes well-known companies like Apple, McDonald’s, and IBM.

Market value

Regardless of other characteristics of a company, its stock can also be characterised according to its market capitalization or value.

Smaller companies can grow faster but are also riskier than large, established businesses.

• Mega-caps are companies worth over $200 billion. There are less than 40 of these companies listed on US exchanges, and just a few others listed in other countries.
• Large-caps are valued at between $10 and $200 billion. There are about 750 such companies around the world.
• Mid-caps are companies valued at $2 to $10 billion. There are around 2,000 such companies around the world.
• Small-cap stocks are worth between $300 million and $2 billion.
• Companies worth less than $300 million can be classified as micro-cap or nano-cap.

Emerging market stocks

The stocks belonging to companies that are based in emerging economies form another category. These economies can grow rapidly for years at a time, as has been the case is China, India, and Brazil. This growth can lead to rapid growth in consumer spending which allows companies to grow very quickly. However, emerging market stocks also come with more risk due to political instability and less stringent regulation.

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