There are 3 types of stocks and how they can be grouped together to analyze them better. Classification also helps to compare them to each other, and ultimately diversify your portfolio.
Once you get a grasp of what a stock is and how to check its value you may want to deepen your knowledge by investigating stocks further.
If the last part is not clear to you I recommend reading my other article ‘Understanding The Stock Market For Beginners‘
1. Stocks By Size
In the world of investing, stock size is categorized based on the market capitalization of a company. The three main categories or types of stocks are small-cap stocks, mid-cap stocks, and large-cap stocks. Each of these categories represents a different level of risk and potential reward. They can be helpful in diversifying your investment portfolio.
Small-cap
Small-cap stocks are those of companies with a market capitalization of less than $2 billion. These companies are generally considered riskier investments. They are often less established and have a smaller track record of success. However, small-cap stocks also have the potential for higher growth. They can provide a substantial return on investment if the company is successful.
There are a total of 4151 small-cap companies out there currently.
Mid-cap
Mid-cap stocks are those of companies with a market capitalization between $2 billion and $10 billion. These companies are considered to be in a period of growth and development and often offer a balance of risk and reward. Mid-cap stocks can provide investors with a moderate level of stability, while still offering the potential for substantial growth.
There are a total of 1200 mid-cap companies out there currently.
Large-cap
Large-cap stocks are those of companies with a market capitalization of over $10 billion. These companies are often well-established, with a long track record of success and stability. These companies may not offer the same level of growth potential as small-cap and mid-cap stocks. However, they are considered to be relatively safe investments and can provide a steady stream of income.
There are a total of 820 large-cap companies out there currently.
Diversifying your investment portfolio is important in managing risk and maximizing your return on investment. By investing in a mix of small-cap, mid-cap, and large-cap stocks, you can reduce the overall risk of your portfolio. This can increase your chances of success. For example, if your portfolio is primarily made up of large-cap stocks, investing in small-cap and mid-cap stocks can help offset the risk if the larger companies experience a downturn.
In conclusion, small-cap, mid-cap, and large-cap stocks each offer different levels of risk and potential reward. By diversifying your investment portfolio, you can reduce your overall risk and increase your chances of success. It is important to give some time to determine the right mix of stocks for your individual investment goals and risk tolerance.
2. Styles Of Stocks
Stocks can also be classified based on their investment style. Three main styles or 3 types of stocks are growth, income, and value. Understanding these styles and how to incorporate them into your portfolio can be a useful tool for risk management and increasing the chances of investment success.
Growth Stocks
Growth stocks represent companies that are expected to grow faster than the overall market and often reinvest earnings to fuel future growth, instead of paying dividends. Although growth stocks offer the potential for significant capital appreciation, they come with higher risks.
- Does well on the bull market – When the market is rising, stocks usually perform much better than others, giving you higher returns.
- First to lose value on the bear market – When the stock market is going to a bear market, growth stocks are the first ones to lose value and the most value. Knowing when to buy and sell these kinds of stocks is very important.
- Usually has a high P/E ratio – Because growth stocks grow faster, these companies have higher P/E ratios than the market average or even the industry average.
- Mostly found in the technology sector – The technology sector is known for getting hyped about. Everybody is excited about new technology and improvements in current gadgets.
Income stocks
On the other hand, income stocks belong to companies that pay a significant portion of their earnings in the form of dividends, providing a steady stream of income to investors. This can be a suitable option for those seeking to supplement their retirement income, but may not offer the same potential for capital appreciation as growth stocks.
- Pays dividends – What is excellent about income stocks is that their dividends give you some income. However, it would be best if you made your homework about these companies. You want them to be paying dividends for at least 10 years without missing a payment or even rising dividends.
- Slow growers – These companies have stopped investing in their growth and believe they cannot grow at such speed, so instead some companies choose to award their investors by paying dividends.
- Perfect for the elderly – As money is generated passively these companies are great for older people who do not want to risk their money, but instead get some returns from their money with minimal risk.
- Old and established companies – Companies that pay dividends usually are old companies that once were growth companies but ran out of ideas to grow even further.
Value Stocks
Value stocks are companies that are believed to be undervalued relative to their financial metrics or earnings potential. Investors which invest in value stocks seek out companies that are trading at a lower price than their true worth and anticipate that the market will eventually recognize their value. These types of stocks can provide income and capital appreciation, but also carry a higher level of risk.
- Companies on sale – You want to look for companies with great fundamentals and whose book value is fantastic, but their stock price is low for some reason. In most cases, this can happen because there is some trouble with these companies.
- May not return on previous value – When buying these companies you have to take the risk that they may never return to the last price.
- Look for competitive advantages – As value investing, methodology says you have to look for companies with some competitive advantage. If you pair this with a low price, you are sure to make some money on your purchase.
- Slower growth after the bear market – Value stocks usually tend to be slow growers after the bear market loosens up.
Diversifying your portfolio by incorporating a mix of growth, income, and value stocks can help manage risk. By doing this you increase the chances of investment success. For instance, if a portfolio primarily consists of growth stocks, adding income and value stocks can help offset potential losses during a market downturn.
In conclusion, growth, income, and value stocks each offer unique characteristics and levels of risk and potential reward. Taking some time to determine the appropriate mix of stocks for your individual investment goals and risk tolerance is essential to a successful investment strategy.
3. Stock Sectors
The Global Industry Classification Standard (GICS) is a widely recognized system for categorizing stocks based on their industry. It was developed by Standard & Poor’s and MSCI and is used by financial professionals and investors to better understand and analyze the makeup of their investment portfolios.
This standard helps us to put every stock in 11 sectors by their primary activities. Every sector has its own traits that help us to analyze them better. So, in total there are 11 types of stocks by sector.
- Technology Sector
- Healthcare Sector
- Financial Services Sector
- Consumer Cyclical Sector
- Industrials Sector
- Communication Services Sector
- Consumer Defensive Sector
- Energy Sector
- Utilities Sector
- Real Estate Sector
- Basic Materials Sector
Each sector is made up of multiple industries, such as Pharmaceuticals within Health Care or Software & Services within Information Technology.
Using the GICS classification system allows investors to have a deeper understanding of the industries and sectors they are invested in. It can also be useful in diversifying their portfolios. For example, an investor may choose to have a well-balanced portfolio by investing in a mix of industries and sectors, instead of putting all their money into one specific industry.
In addition, the GICS classification system provides investors with a consistent and transparent framework for comparing and analyzing stocks across different industries and sectors. This allows for easier comparison and benchmarking of stocks, which can help inform investment decisions.
In conclusion, the Global Industry Classification Standard (GICS) is a widely used system for categorizing stocks based on their industry and sector. Using the GICS classification system can provide investors with a deeper understanding of their portfolios, help them make informed investment decisions, and promote diversification by investing in a mix of industries and sectors.
I recommend reading my other article – ‘11 stock market sectors‘
Conclusion To 3 Types Of Stocks
- Stocks can be classified by their size. Small-cap, mid-cap, and large-cap.
- Stocks can be classified by their style. Growth, income, or value.
- Stocks can be classified by their sectors. There are a total of 11 of them: Technology, healthcare, financial services, consumer cyclical, industrial sector, communication services, consumer defensive, energy sector, utilities sector, real estate, basic materials sectors.
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