There are thousands of stocks to choose from, so for beginners, trading individual stocks can be scary. But a well-diversified portfolio should contain shares in different types of companies, so it’s important to understand what each type is.
Building a portfolio: different types of stocks
As well as being split by size, sector and geography, stocks can also be broken down into a number of other categories, including growth, income, and blue chip.
Russ Mould from AG Bell explains the difference between these stocks.
Growth and income stocks mostly reflect a company’s plan for growth and its dividend distributions. Growth stocks are often technology-centered, and they can rise in value quickly, but often fall even quicker. Income stocks are often related to blue chip, and include many energy and utility companies.
Examples of blue chip companies include Vodafone, BP, HSBC as well as Apple and Yahoo along with other Dow Jones Industrial Average companies. It’s called blue chip because in the game of poker the blue chips have the highest value.
Growth stocks are also generally tied to economic cycles which brings us to other types of stocks: cyclical and defensive.
Cyclical stocks tend to be the most affected by economic cycles, while defensive stocks are less prone to the impact of the cycle and tend to perform better than cyclical stocks in the down cycle.
The size of the company is also important in stock pricing and although there is no universal agreement on this, companies can generally be categorised as such:
Mega-cap: over $200 billion
Large-cap: $10 billion-$200 billion
Mid-cap: $2 billion-$10 billion
Small-cap: $250 million-$2 billion
Micro-cap: below $250 million
Nano-cap: below $50 million