The world of stock investing is vast and can become as complex as you like. In order to gain an understanding of stock investing its important to know the different categories (or types) of equities. This knowledge will help you build a well diversified portfolio, thus protecting and growing your assets at the same time.
Growth, Value and Income Stocks
One way to look at the universe of stocks is by their valuation, speed of growth and income type. Investors and financial planners are wise to use these classifications when building portfolios.
Growth Stocks - Stocks that have an above average earnings growth rate are considered growth stocks. These stocks can provide double or triple digest returns, however they can also sink quick if investors begin to doubt the sustainability of the growth rate.
Value Stocks - Equities that fall into this category are seen as undervalued given their earnings potential and other measures of valuation. Investing in value stocks can be tricky as sometimes the stock remains undervalued for a long period of time.
Income Stocks - The stocks that pay a high dividend, relative to other stocks, fall into the class of income stocks. These assets can provide a stream of income to investors, though not guaranteed.
Large, Mid, Small and Micro-Cap Stocks
Another way to classify stocks is by the size of the company or market capitalization. A company's market cap is determined by multiplying its number of outstanding shares and the value of one share of its stock.
Large-Cap Stocks - This category of stocks includes companies with a capitalization above $10 billion. These stocks are usually extremely liquid and are held by many investors and institutions.
Mid-Cap Stocks - Companies with a capitalization of $2 billion to $10 billion are considered mid-cap stocks. Sometimes these stocks can offer a good amount of growth with a reasonable level of risk.
Small-Cap Stocks - Small-cap stocks have the potential for high earnings growth, however they usually have a higher degree of risk than larger companies. These stocks have a capitalization between $200 million and $2 billion.
Micro-Cap Stocks - A company with a capitalization under $200 million are considered micro-cap stocks. These investments are usually the most speculative and carry the highest risk.
Cyclical, Defensive and Speculative Stocks
Cyclical Stocks - Earnings of many companies fluctuate as the demand for their products and services changes with the business cycle. Usually the business cycle effects entire industries at a time, and consequently all of the companies in that industry.
Defensive Stocks - Companies that have relatively stable revenue, regardless of the business cycle, are considered defensive stocks.
Speculative Stocks - Equities that have the potential for high returns at a high risk are usually classified as speculative stocks. Many determine that stocks in highly uncertain industries, such as biotech, are speculative.
Understanding the different categories of common stock will help you build a well diversified portfolio.