What are the Different Types of Stocks?

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While most investors know they can invest in multiple types of assets, you might not know that there are multiple types of stocks. The type of stock you invest in and how these stock types make up your portfolio can influence your returns and the level of risk you should expect. Investing in multiple types of stocks is one way you can diversify your portfolio and reduce your chance of sudden losses. 

The Different Types of Stocks

There are multiple types of stocks — and the stocks you select to make up your portfolio will play a major role in the level of return you see and the risk you take when you invest. The following are some of the major classifications of stocks and how they may influence your returns. 

Growth Stocks 

Growth stocks tend to produce higher returns during times of economic growth. For example, stocks in the tech industry have seen a sharp increase in value in the last few years, as access to venture capital and consumer interest peaks. While growth stocks tend to increase in value during periods of growth, they may see compounded losses during recessions. 

Value Stocks 

In addition to growth stocks, you can also add value stocks to your portfolio to balance risk and return. Value stocks are stocks in sectors that tend to retain value during periods of recession and when interest rates are high. While value stocks may not see the same returns as growth stocks, they will follow the overall trend of the market during economic expansion. Examples of value stocks include those in the healthcare, basic utility and financial services arenas. 

Blue Chip Stocks

Blue chip stocks are associated with companies that have well-established foundations in the market. These stocks have large market capitalizations, and they may have total outstanding share values in the billions. Blue chip stocks typically show less market volatility when compared to smaller companies, so more conservative investors may have larger holdings of blue chip investments. 

Many blue chip stocks make up large parts of major stock market indexes, like the S&P 500 and the Dow 30. Some examples of blue chip stocks include tech giant Apple Inc. (NASDAQ: AAPL), multinational e-commerce site Amazon.com Inc. (NASDAQ: AMZN) and food and beverage manufacturer The Coca-Cola Co. Inc. (NASDAQ: KO). 

Cyclical and Non-Cyclical Stocks

Cyclical stocks are shares in companies whose performance and stock price tend to fluctuate in line with the economic cycle. These stocks are typically found in industries that are sensitive to economic changes, such as automotive, construction and travel. When the economy is booming, consumers have more disposable income, leading to increased demand for non-essential goods and services produced by these companies. As a result, cyclical stocks often perform well during economic expansions. However, during economic downturns or recessions, demand for these products tends to fall sharply, causing stock prices to decline, making cyclical stocks inherently more volatile compared to non-cyclical stocks.

Non-cyclical stocks, on the other hand, represent companies that are less affected by economic cycles, and their products or services are considered essential. These stocks often belong to industries such as utilities, healthcare and consumer staples (like food and beverages), which maintain stable demand regardless of economic conditions. Investors often turn to non-cyclical stocks during economic uncertainty, as they tend to be more resilient and can provide steady dividends. Consequently, while cyclical stocks can offer higher returns during economic growth phases, non-cyclical stocks are viewed as safer investments in times of economic unpredictability, appealing to risk-averse investors looking for stability in their portfolios.

IPO Stocks

When a stock is offered to investors for the first time, it issues an initial public offering (IPO). If a company that you’ve been interested in investing in makes the decision to go public, you may want to try and buy in during the stock’s IPO. IPO stocks are usually listed to investors at a discount before they’re listed on the general market.

Keep in mind that not every online brokerage provider offers access to IPO listings before they’re public. If you’re interested in IPO investing, look for a broker that offers an IPO calendar and early access to stock investing with new companies. Keep in mind that IPO stocks come with risk, as these companies do not have as much price history to rely on when choosing companies for your portfolio. 

Penny Stocks

Penny stocks are shares of stock issued by companies with small total market capitalizations. Despite the name, the Securities and Exchange Commission (SEC) defines a penny stock as any stock that regularly trades below a value of $5. 

Penny stocks tend to be risky, highly volatile investments. In contrast to blue chip stocks, a penny stock may gain or lose 10% or more of its value on a daily basis. Some traders take advantage of these fluctuations in price through short-term trading strategies like scalping and swing trading. If you decide to invest in penny stocks, be sure they only make up a small percentage of a diversified stock portfolio. 

Defensive Stocks

Defensive stocks are shares in companies that tend to be stable and provide consistent dividends regardless of the economic climate. These stocks typically belong to sectors that offer essential goods and services, such as utilities, healthcare and consumer staples, which consumers continue to purchase even during economic downturns. As a result, defensive stocks are often viewed as a safer investment during periods of market volatility, helping to preserve capital.

Common Stock

A common stock is a type of security that represents ownership in a corporation and provide investors with voting rights on company matters, such as electing board members. Common stockholders also receive dividend payments, which are payments made by the company to its shareholders according to their portion of ownership in the business. As a common stockholder, you have the potential to benefit from the company’s profits or losses.

Preferred Stock

Preferred stock is a type of equity security that typically offers a fixed dividend and has preference over common stock in the event of liquidation. Holders of preferred stock generally do not have voting rights, but they do enjoy a higher claim on assets and earnings compared to common shareholders. This form of stock attracts investors seeking stable income, as dividends are usually paid before any distributions are made to common stockholders.

ESG Stocks

ESG stocks refer to shares of companies that prioritize environmental, social and governance (ESG) criteria in their operations and business practices. These companies are assessed based on their sustainability efforts, ethical governance and social responsibility, aiming to generate positive impacts alongside financial returns. Sustainable investors are increasingly interested in ESG stocks as they seek to align their portfolios with their values and invest in businesses contributing to a sustainable future.

How to Diversify With Stocks

Putting all of your money into a single stock is never a good idea. There are a few ways to diversify your stock portfolio to limit your risk of loss, including: 

Use Dollar-Cost Averaging

Dollar-cost averaging is an investing strategy you can use to avoid panic buying and selling. When using a dollar-cost averaging strategy, an investor will invest a specific dollar amount on a set schedule instead of attempting to time the market or buy when the stock seems undervalued. Over time, these investment returns will even out, allowing you to reap more rewards over time. Use dollar-cost averaging when buying stocks and funds to keep consistent returns.

Think About Companies You Trust

If you’re having trouble finding inspiration when it comes to choosing which stocks to buy, take a look around your home for inspiration. Everyday products like groceries, cell phones, laptops and luxury fashion are commonly produced by blue chip companies, which can make them exciting and relatively stable investments.

Go Beyond Stocks

While investing in stocks can bring potentially market-beating returns, they’re not the most diversified assets you have access to. Mutual funds and exchange-traded funds (ETFs) provide you with the returns of a bundle of stocks grouped together by type, industry, returns or other features. Investing in a host of ETFs with different themes is a great way to add an instant layer of diversification to your portfolio.

How to Choose the Right Stocks to Buy

The best investments for your portfolio will vary depending on your unique situation. Here are a few factors to consider when thinking about which stocks to buy: 

Think About Your Goals

The first thing to think about when choosing your investments is your investing goal. If you’re saving for a major long-term goal like retirement, you’ll want to choose more conservative investments that are likely to increase in value slowly over time. If you’re looking for income generation, you may want to develop a short-term trading strategy using lower-priced assets.

Choose Multiple Sectors

Diversify your portfolio in terms of both sectors and stock type. You may want to choose a few of each major stock type from each investment sector you add (technology, retail, real estate, etc.).

Monitor Your Portfolio

Remember to monitor your portfolio according to your investment strategy. If you’re taking a long-term investment strategy, you may need to check your investments only once or twice a year. If you’re a short-term investor, you should be tracking your value movements daily or even more frequently. Don’t be afraid to readjust your portfolio allotment as your needs and goals change.

Growth Stocks vs. Value Stocks

Growth stocks and value stocks are two distinct categories of stocks that vary in the way they are viewed by investors. Growth stocks are expected to outperform the market over time due to their growth potential, while value stocks offer a lower price and may be undervalued compared to the overall market.

Growth stocks typically have higher valuations than the broader market, as investors are willing to pay more for the potential of higher returns. Examples of growth stocks include technology and biotechnology companies that are expected to have above-average revenue or earnings growth.

Value stocks, on the other hand, may be viewed by investors as being undervalued compared to the broader market. These stocks tend to have lower valuations than the overall market but offer good potential for long-term gains. Examples of value stocks include mature companies that have solid fundamentals but are trading at a low price compared to the overall market.

Compare Online Brokers

Before you can begin buying and selling shares of stock, you’ll need to open an account with an online broker. There are dozens of brokers providing stock market access in as little as a few clicks. If you don’t already have a trading account, consider beginning your search with a few of the links below. 

Making Better Investing Decisions

There are many different types of stocks that can be bought and sold on the stock market. Each type of stock offers its own set of risks and rewards. Before investing in any particular type of stock, it is important to understand the pros and cons associated with the investment and how it fits into your overall portfolio strategy. Knowing what type of stock you are investing in can help you make more informed decisions and maximize your chances of success.

Frequently Asked Questions