What are the different types of stocks that I can invest in?

Below, you will read about the various stocks that are out there and their general characteristics. This will hopefully help you figure out which stocks are best for your trading portfolio.

Furthermore, nothing prevents you from investing or trading several different types of stocks at the same time. However, it's good to have an idea of what separates them, as they aren't always right for the current trading environment (example: if we're currently in a recession, or in a growth period, etc.).

Income stocks

An income stock is a share that pays dividends to its investors on a regular basis. Income stocks usually offer a high yield that may generate the majority of the stock's overall returns. While there is no specific % of dividend payout that places a stock in the "income stock" category, most income stocks have lower levels of volatility than the overall stock market, and offer higher-than-market dividend yields.

Also, they may have limited future growth options, they will thereby require a lower level of ongoing R&D investments. Any excess cash flow from profits can be distributed to investors on a regular basis, often quarterly.

Income stocks can come from any industry, but investors commonly find them within real estate (through real estate investment trusts), energy sectors, utilities, natural resources and banking/brokerage institutions such as Wells Fargo, HSBC, ING, Societe Generale, Lloyds, Brown-Forman (the company that owns and markets Jack Daniels whiskey!), Otis Worldwide (you've probably been in one of their elevators/lifts in the last few days), Walmart (US-based superstore chain, tons of product references), Canadian National Railway, Clorox (one of the few companies to do great during the Coronavirus, due to additional surface cleaning recommendations), etc.

Cyclical stocks

Cyclical stocks follow an upward turn in the business cycle when businesses and consumers are spending money.

Automobile manufacturers are a good example of a cyclical stock. When the economy is good, and people benefit from stable and well-paying jobs, car sales do well. When economies enter recession territory, layoffs occur, unemployment rises, and so people may decide to postpone such big purchases to a later date.

Businesses expand during good economic times. They buy new equipment, build new facilities and have money to invest in research and development. Equipment makers, construction companies, real estate, and technology are cyclical stocks.

When the economy slows, businesses run down inventory, put off expansions, and delay purchases. Cyclical stocks such as steel manufacturing and sales suffer when business slows down.

This is why cyclical stocks are considered an offensive tactic in investing. You use them to (hopefully) generate high returns as quickly as possible when the economy is good.

Examples of cyclical stocks that can be added to a trading portfolio include: JPMorgan Chase, Ford, Apple, General Motors, Texas Roadhouse, Boeing, Exxon, Walmart (they also fit into this category, they are especially successful during recessions as their pricing is lower than standard retailers), etc.

Growth stocks

Growth stocks are companies that increase their revenue and earnings faster than the average company (in the market or its industry).

Often a growth company has developed an innovative product or service that is gaining market share in existing markets, entering new markets, or even creating entirely new industries.

Businesses that can grow faster than average for long periods tend to be rewarded by the market, delivering handsome returns to shareholders in the process. And the faster they grow, the bigger the returns can be.

Unlike value stocks, growth stocks tend to be more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios. Yet despite their premium price tags, the best growth stocks can still deliver fortune-creating returns to traders as they fulfill their great potential for growth.

Example of growth shares: Facebook, Netflix, Amazon, Salesforce.com, etc.

Value stocks

While there is no formal definition of a value stock, the companies they represent are known for being valuable, stable and established. They’re typically well-known, household names and investors count on them for their time-tested reliability.

Think of a value stock as a stock you would bring home to meet your parents: It makes a good impression and has the substance to back it up. It’s stable, responsible and reliable.

Such blue-chip companies have proven themselves in both good times and bad, and the stocks have a history of solid performance. They typically have the following shared characteristics: a large market capitalisation, a solid growth history, they're included in a major market index such as the S&P 500 or Dow Jones Industrial or FTSE 100, and they issue dividends regularly (at least once a year).

Example of value stocks: British Petroleum (BP), Disney, IBM, Microsoft, Apple, Coca-Cola, McDonald's, etc.

Tech stocks

Obviously, these stocks belong to technology companies that manufacture different types of devices, computers, hardware, equipment, etc. Some of these companies, such as Microsoft, also fall into the Blue Chip category. Are they risky? They indeed can be. If a competitor announces a technological breakthrough, this can have a significant negative impact on a company's stock price.

Why? We all know that technologies are constantly evolving. Today's new television is already a relic tomorrow, figuratively speaking. The unpredictable results of technological research and the uncertain outcome of new products are a serious factor to think about. Think about how quickly we shifted from vinyl to cassettes to CDs to the new online digital formats (mp3s, wav files, streaming on services such as Sportify or Deezer, etc.)

Example of tech stocks: Adobe, DocuSign, PayPal Holdings, etc.

Speculative stocks

A speculative stock is a stock that a trader uses to speculate on future growth. The fundamentals of the stock do not show an apparent strength or sustainable business model, but people think that something bright or some sort of breakthrough lies ahead. Speculative stocks appeal to day traders due to their low share price and greater volatility compared to traditional value stocks. The greater volatility enables traders to make healthy profits if the trade goes in their direction. The challenge is to find ways to limit losses if the trade flops.

Oftentimes, speculative stocks are clustered in sectors such as mining, energy, technology, and chemicals. While there is significant risk involved in investing in startup companies in these sectors, the possibility that a small company may find a giant mineral deposit, invent the next big iPhone app, or discover a cure for AIDS or cancer offers enough incentive for traders with an appetite for risk to take a chance on them.

Although most speculative stocks tend to be startups, an old-school company such as Microsoft can occasionally become a speculative stock if it falls upon hard times and has rapidly deteriorating prospects for the future. Such a stock is known as a "dog" and can offer an attractive risk-reward ratio if it can manage to turn its business around and avoid bankruptcy.

Businesses that provide online services and operate on the internet are a few examples. They often pride themselves on offering innovative solutions and products with extremely high market capitalisation, but their actual profits are very low (MP3.com was once valued at over $8 billion although the company's sales of music were in the hundreds of thousands of dollars! Traders once saw the stock double in price following a reassuring speech by the CEO; however, months later, cracks became apparent in the business model and the stock price slowly started slipping, eventually leading to the demise of the company). Their capital is more symbolic than monetary. This class of shares is perhaps more aimed at gambler-types than serious investors.

Defensive stocks

Defensive stocks are also called as non cyclical stocks. Cyclical stocks tend to outperform the market when the economy is in good shape and underperform when the economy faces a downturn.

On the other hand, defensive stocks give stable returns all the time. Picking of quality stocks that suit your investment objective is very essential. You have to regularly have a watch over your portfolio to know which stocks are outperforming and which are underperforming.

Based on this, you can either add particular stocks or remove stocks to get better returns.

Defensive stocks resist the ups and downs of the economy. They can even generate profits in lousy economic times.

For example, during a recession, most families cut back on automobile or holiday/vacation spending, but they can't stop spending even if they want to. While people can avoid certain expenses (cars, luxury goods, plane trips to the Bahamas, pool tables, etc.), they will spend more on discounted goods and services.

Example of defensive stocks: pharmaceuticals (Johnson & Johnson, Pfizer, GlaxoSmithKline, etc.), food producers (Nestle, Unilever, Coca Cola, etc.), utility companies, phone companies (Verizon, etc.).

Summary

Taken as a whole, there are a wide range of trading opportunities when it comes to investing or trading in stocks. Just like investors, they have different characteristics and profiles. If you prefer a regular stream of income, then income shares are the best bet. Do you have a high tolerance for risk? Consider investing in speculative stocks that offer greater potential for bigger profits.

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