Investing in the stock market has historically been one of the most important routes to financial success. When looking into stocks, you’ll often hear people talk about them in terms of different types and groups. These are the key kinds of stocks you should know about.
- Large-cap stocks
- Mid-cap stocks
- Small-cap stocks
- Growth stocks
- Value stocks
- IPO stocks
- Dividend stocks
- Non-dividend stocks
- Blue chip stocks
- Penny stocks
Large-cap, Mid-cap, and Small-cap stocks
The market capitalization of a stock is the total amount of money that all of its shares are worth together. Large-cap stocks are those of companies with the biggest market capitalization, while mid-cap stocks and small-cap stocks are those of companies with smaller market capitalizations.
No clear line can be drawn between these two groups. But one common rule says that a stock is a large-cap if its market capitalization is $10 billion or more, a mid-cap if its market capitalization is between $2 billion and $10 billion, and a small-cap if its market capitalization is less than $2 billion.
Mid-cap and small-cap stocks have more growth potential in the future, but they are riskier choices than large-cap stocks, which are usually seen as safer and less risky. But just because two businesses are grouped together here doesn’t mean they are similar investments or that they will do the same in the future.
Growth stocks and Value Stocks
Another way to group things shows the difference between two popular investment strategies. Growth buyers usually look for businesses with fast-growing sales and profits. Value buyers look for companies whose stock is cheap compared to their competitors or to how much it has been worth in the past.
Most of the time, growth stocks have higher levels of risk, but the possible rewards can be very good. Growth stocks do well when customers want their products and services a lot and want to buy more of them. This is especially true when longer-term changes in society encourage people to use their goods and services.
But competition can be tough, and if rivals stop a growth stock from doing its job, it may lose popularity quickly. Even a small slowdown in growth can cause prices to drop quickly if investors worry that long-term growth potential is going down.
Value stocks, on the other hand, are thought to be safer buys. Most of the time, they are already well-known, established businesses that have grown to be market leaders and don’t have as much room to grow. But because they have stable business structures that have been around for a long time, they can be good choices for people who want more price stability while still getting some of the benefits of investing in stocks.
IPO stocks are the shares of companies that have just gone public for the first time. Investors who want to get in on a good business idea early are often very excited when a new company goes public. But they can also be risky, especially if investors have different ideas about how they could grow and make money. Usually, a stock stays an IPO stock for at least a year and up to two to four years after it goes public.
Dividend Stocks and Non-Dividend Stocks
A lot of stocks give their owners regular payments. Because dividends give buyers a lot of money, dividend stocks are highly valued in many areas of finance. Technically, a company is a dividend stock if it pays out at least $0.01 per share.
Stocks, on the other hand, don’t have to pay dividends. Even if a stock doesn’t pay income, it can still be a good investment if its price goes up over time. Even though more stocks have been giving dividends to their owners in recent years, some of the biggest companies in the world still don’t pay dividends.
Blue Chip Stocks
There are also stock groups that make decisions based on how good they seem. Blue Chip companies are often the best of the best in the business world. They tend to be leaders in their fields and have strong names. Even though they don’t usually have the best returns, investors who aren’t willing to take as much risk choose them because they are consistent.
Penny stocks, on the other hand, are shares in low-quality businesses that are generally worth less than $1 each. Because penny stocks are dangerous and based on speculation, they are vulnerable to scams that can make you lose all of your money. Penny stocks come with some risks that you should be aware of.
You’ve probably heard that it’s important to have a varied portfolio if you want to make good, safe purchases. As you plan for diversity, keep in mind that investing in companies with different market capitalizations, regions, and investment strategies can help you build a well-balanced portfolio.