Getting to Know the Different Types of Stock

Stocks are a key component of many investment portfolios. While not without risk, some may offer high growth potential over the long term. But did you know that there are many different kinds of stocks within the broader asset class?

Here’s a breakdown of the main types of stock to help you understand their potential benefits and risks. Keep in mind, you should always evaluate investments carefully, and you may want to work with a Financial Advisor who can help shape an investment strategy specific to your situation.

Blue-Chip

Blue-chip stocks are the publicly traded stocks of large companies that have an established, reputation of growth, profit and dividend payout.¹ The Dow Jones Industrial Average (DJIA) is a market index that tracks blue-chip stocks from 30 of the largest companies in the U.S. 

Growth

Growth stocks are stocks of companies with earnings that are expected to grow at a faster rate than the industry average. Companies that sell growth stocks typically reinvest their earnings into research and development rather than paying out dividends to shareholders.

These types of stocks often come from sectors where technical advances or new products are anticipated to grow companies rapidly. While these stocks have a high reward potential, they also can be relatively risky since growth is not guaranteed.

Value

Value stocks tend to trade at a price that is lower than their intrinsic value, and lower than the broader market. Value stocks might come from companies that have faced business setbacks or those within slow-growth industries. Investors might choose value stocks if they are motivated by the possibility of a rebound.

Income

Income stocks pay regular, often higher-than-average dividends and tend to have a lower level of volatility than the overall stock market. Telecommunications, electric and natural gas stocks, as well as stocks or companies that invest in real estate, are common examples.

Other Categories

In addition to the four major categories described above, there are also:

Cyclical stocks: A cyclical stock is one with a price that moves in sync with ups and downs in the business cycle or overall economy. Cyclical stocks typically include retail and automotive companies that sell items that consumers can afford to buy in a booming economy but will cut back on during a recession. 

Defensive stocks: Also called non-cyclical stocks, these are stocks of companies—in industries such as utilities and health care—whose business performance and sales are either unaffected by or not highly correlated with changes in the business cycle. Defensive stocks may help "defend" your portfolio from losses during uncertain times because they tend to be less vulnerable to economic downturns.

Penny stocks: The term "penny stock" generally refers to a stock that trades at less than $5 per share. These are considered high-risk and have low trading volumes. Penny stock companies tend to be small and growing, with limited resources and track records. This category might also include companies that have filed for Chapter 11 bankruptcy.

Choosing Stocks for Your Portfolio

Your investment strategy should be unique to you. The types of stock you buy and in what quantities ultimately depend on factors including your goals, your risk tolerance and how much time you have before you want to use the money. Diversifying your portfolio across several stock types, in addition to other asset classes, could give you the opportunity to capture returns from well-performing sectors while mitigating risks from more volatile ones.

Building a well-rounded portfolio can be daunting, especially if you’re new to investing. When making these important decisions, you may want to work with a financial professional who can help you make choices based on your goals. 

Footnotes:

¹ https://money.usnews.com/investing/term/blue-chip-stock(opens in a new tab)(opens in a new tab). Accessed March 27, 2024.