List of the types of stocks every investor should own

 

Stocks are the most interesting, lucrative and equally risky form of investment. Investors buy shares expecting good returns. Many of Warren Buffett's likes have made billions only through trading, while many have had bitter experiences investing in stocks. Thus a careful understanding of stocks is essential before going into the market as there are many different types of stocks which have their own advantages and disadvantages as well. Read further to know types of stocks every investor should own

Income stock

An income stock is an equity security that offers a higher yield than can be generated by the majority of the security's overall return. It is a very popular type of stock among investors as it is the least volatile among all and offers a higher dividend yield than the market to its investors.

Income stocks are typically issued by large and well-established organizations that have an impressive track record of managing their business operations and finances. Also, whenever a large organization makes some profit, most of it goes to the investors instead of reinvesting in the company.

Piggy Bank

Penny stocks are usually issued by small companies especially start-ups to raise money from investors. This type of stock is usually illiquid, traded at a very low price, and is issued by companies that have a very low market capitalization.

In the Indian trading market, penny stocks usually trade below the price of Rs. 10 And in Western markets, such shares are usually traded below $1 most of the time. Many consider a stock priced under $5 to be a penny stock. The advantage of investing in penny stocks is that it is available at a low cost and has the potential to convert a 'small investment' into a 'luck'. For example, if you buy 50,000 shares of a penny stock at $1 each, even a $1 increase in the share price could lead you to earn $50,000 in a limited amount of time. However, as people say that with every good thing comes some risk, there is a flip side as well.

Speculative stock

Stocks issued by companies that are developing new products, looking to tap unexplored territory (often foreign markets), or have made major changes to their management or financial levels, are considered speculative stocks. Such stocks usually carry high risk as the company, product and management form and are often not successful in the long run but if such companies are successful then the return on investment can also be very high. It promises high returns but the risk is also high.

Growth stock

In growth stocks, whenever a company makes a profit, the money is reinvested in the company itself to fuel its innovation and business expansion. In this type of stock, investors do not get any dividend but they get capital gain whenever they sell their stock. As the company grows the share prices also rise and the investor receives more capital gains but when the reverse happens, the customers also suffer. Usually, loyal customers who somehow trust a company, its product and management, invest their money in these types of stocks for a long time. Both small and large enterprises issue growth stock.

Cyclical stock

Stocks in companies that offer luxury and discretionary goods and services are often considered cyclical stocks.

Airlines, automakers, hotels, restaurants and clothing stocks fall into this category. The performance of such stocks is linked to the health of the economy. When the economy does well, the prices of such stocks usually remain high, and when it does poorly, the stock loses significantly in value. For example when the economy flourishes, people move out of their homes and invest in buying cars, houses, shops and travel, so prices go up. And when the economic downturn begins, these discretionary spending are the first ones any consumer deducts from their wallet. However, in many cases, cyclical stock prices rise as the economy recovers after a recession and even (at times) exceed their old value. Many such stocks have bounce back potential (sometimes) and are, therefore, considered a favorite among many investors.

Value stock

Sometimes when a company has assets worth more than its stock price, that stock is considered a value stock. Such stocks are viewed by investors as undervalued stocks and they believe that the value of its shares will increase as the company grows. And if the company doesn't do well then there can be loss too.

Defensive stock

Apart from food, fuel and health services, there are some things that every human being needs at all times. Even if the recession starts, no one stops them from eating food, refueling in empty tanks or going to hospitals. Stocks of such critical services are considered defensive stock.

Such stocks are almost immune to any economic downturn, profit or financial meltdown.