Understanding the Different Types of Stocks

Author: James Clark

7 Types of Stocks Every Trader Should Know About

Stock trading is among the most engaging, profitable, and equally risky forms of investment. It involves buying stocks with the hope of gaining profit. Sounds simple, doesn’t it? While people like Warren Buffet and George Soros have made billions through trading, most traders have experienced great losses. Thus, understanding the different types of stocks is essential before leaping into the market.

In this post, we’ll walk you through the 7 types of stocks every trader should know about to help you make better investment decisions.

Read on to learn them!

7 Types of Stocks Every Trader Should Know About

As a new trader, the first thing to do is understand your goals and what you aim to achieve. This will help you decide which types of stocks to consider. Generally, traders classify stocks using various parameters, including:

 Size of company
 Industry
 Risk
 Volatility
 Ownership rules and privileges, etc.

So without further ado, let’s look at the 7 different types of stocks you can consider investing in:

1. Income Stocks

Income stocks are extremely popular in all industries because they have low volatility, meaning traders can generate a steady and stable income in the form of a dividend. However, there are fewer opportunities because only large and stable companies, such as real estate and energy sectors offer this stock type. For unemployed or retired people, this is a great low-risk type of stock to invest in.

2. Speculative Stocks

The name says it all. Speculative stocks belong to corporations that hardly have any earnings and are developing new products or tapping unexplored territory. These stocks are extremely volatile but are potentially profitable due to product hype, expansion, or even internal changes.

These stocks are extremely risky because they’re fueled by information mills and do not abide by conventional reasoning. They’re more suitable for day traders who can take advantage of rising and dropping prices during trading sessions.

3. Defensive Stocks

Defensive stocks are a trader’s safety net. They belong to industries that are immune to recessions, financial slumps, or bear market conditions. They include food, power, fuel, healthcare, and other essential services.

4. Tech Stocks

Many traders like to invest in stocks of tech companies that manufacture computers, gadgets, mobile devices, and equipment. With thousands of brands, including global tech leaders like Apple, Samsung, and Microsoft, these stocks are still risky due to immense competition.

5. Cyclical Stocks

Cyclical stocks belong to companies that offer luxury and non-essential goods and services. Popular options include stocks of restaurants, car manufacturers, airlines, travel, and hotels, etc. These stocks are highly dependent on macroeconomic factors. For example, when the economy flourishes, more people can afford to travel, shop, and buy cars, leading to increases in prices.

When this happens, stock prices increase and remain high. However, when the economy is down, these stocks lose value.

6. Growth Stocks

Growth stocks are similar to income stocks. However, in the case of growth stocks, business leaders reinvest in their companies to increase profits and returns instead of paying dividends to shareholders. The risk involved in this type of stock is that if the company doesn’t grow as anticipated, you might lose money if share prices drop.

7. Blue-Chip Stocks

Lastly, Blue-Chip stocks belong to companies with solid foundations and a historical record going back decades or even centuries. Even though these companies offer stable returns, developments are slower. However, compared to volatile stocks, they’re a safer place to park your hard-earned cash. Popular companies include Microsoft, Apple, Walmart, Ford, and McDonald’s, etc.

Bottom Line

Different types of traders invest in different types of stocks. As you have read above, there is a wide range of business opportunities to seize. For steady players, income stocks are the way to go. But if you like risks, you can consider growth or speculative stocks.
