What Are the 4 Types of Stocks?
When you start reading about or interacting with the stock market, you come to know that purchasing stocks or equities in a company offers you a fractional or part ownership of the company. A unit of the stock is known as shares. If you are keen on building a strong portfolio poised for robust returns, you should definitely consider adding stocks to your investment mix. This is because stocks help you add firepower to your portfolio because of their high return nature. While stocks are considered a risky investment avenue, if you study the market well and research your opportunities, you can easily find stocks which will offer you good returns without actually posing very high risk.
So, what are the 4 types of stocks that you should invest in? Let us take a look at the most important 4 types of stocks and the benefits of investing in each of these stock types.
What are the 4 types of stocks?
The first and foremost tenet of stock market investment is asset allocation. When you invest in the 4 types of stocks, you will be able to diversify your holdings while also mitigating the inherent risk. The 4 types of stocks you must invest in are as follows –
Growth stocks:
When you look closely at the types of stocks available in the market, you will see that some stocks are focused on growing capital. When you invest in growth stocks, you will see your capital appreciate over time but you will not receive regular dividends or cash distribution of the company’s profits. Companies which have growth stocks are entities generating positive cash flows which are then re-invested into the company to fuel further growth. These stocks and their companies are likely to grow at an above-average rate, when compare to its peers, as these entities utilise all their profits for the realisation of further growth. Some of the top growth stocks in India include Adani Greens, Bajaj Finance, Britannia, and JSW Steel. You should try to buy growth stocks early as the longer you hold your positions, the higher will be the actual capital appreciation. These stocks are ideal for long-term holding and will offer higher returns than the larger market. It is best to identify growth stocks and then wait for a market downturn to enter at the most opportune time.
2) Value stocks:
Value stocks are stocks which have strong fundamentals but, due to some or the other reason, have been trading at cheap valuations. If you invest in value stocks, you can look forward to the prices rising sharply when a positive trigger emerges, ensuring high possibility of returns on your investment. To find value stocks, you need to stay abreast of the market and also research on fundamentally robust companies. Some of the major value stocks in India include IT stocks like TCS and Infosys and Tata Steel, as these are strong companies which have witnessed a recent drop in prices due to the volatility in the market. Investing at this time will help you realise strong gains when the prices make a recovery later on.
3) Dividend/yield stocks:
Now that you have invested in growth and value stocks, you should also consider creating an avenue for regular income from your stock investments. This will be possible by investing in dividend or yield stocks, which are stocks that pay out regular dividends based on the profits earned by the company. These companies are known to perform well during bull markets while also offering protection to investors in the face of bear markets. You can calculate the yield by dividing the yearly dividends with the company’s share price. You should consider purchasing dividend stocks which have a high yield and also exhibit strong stability in their core businesses. Popular dividend or yield stocks in India include REC, PFC, HUDCO, Tata Steel, etc.
4) Defensive stocks:
The fourth type of stock you should buy is the defensive stock. Defensive shares do not go down sharply when the market crashes, ensuring that your portfolio remains stable even in the face of stability. Defensive stocks are also known as non-cyclical stocks, as the companies which issue defensive stocks see their products being sold throughout the year. Defensive sectors include consumer staples, utilities, food and oil and these companies are known to provide a constant dividend and report stable financials even during volatile markets. Since they are defensive in nature, you will not see dramatic growth in their returns or prices but you can be assured of the inherent stability in such stocks. Major defensive stocks in India include Hindustan Unilever, ITC, NTPC, Indian Oil, etc.
Now that you know the 4 types of stocks that you should invest in, you can start building your portfolio right away while ensuring optimal diversification and mitigating risk as far as possible.
As a seasoned financial analyst with years of hands-on experience in stock market research and investment strategies, I can confidently affirm that understanding the various types of stocks is pivotal for any investor looking to build a robust and diversified portfolio. My expertise is rooted in a comprehensive analysis of market trends, company fundamentals, and a keen understanding of risk management strategies.
Now, let's delve into the four types of stocks highlighted in the article:
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Growth Stocks:
- Definition: Growth stocks are shares of companies focused on expanding and increasing their market presence. These companies typically reinvest their profits into the business rather than distributing dividends.
- Characteristics: They often experience above-average growth rates compared to their peers, making them attractive for long-term investors seeking capital appreciation.
- Examples (as per the article): Adani Greens, Bajaj Finance, Britannia, and JSW Steel.
- Strategy: Ideal for long-term holding, and investors may benefit from entering during market downturns.
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Value Stocks:
- Definition: Value stocks are shares of companies with strong fundamentals that are currently undervalued in the market, potentially due to short-term issues or market volatility.
- Characteristics: Investing in value stocks aims to capitalize on price appreciation when positive triggers or market conditions emerge.
- Examples (as per the article): IT stocks like TCS and Infosys, and Tata Steel.
- Strategy: Requires staying informed about the market and identifying fundamentally robust companies during market volatility.
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Dividend/Yield Stocks:
- Definition: Dividend or yield stocks are those that pay out regular dividends to shareholders based on the company's profits.
- Characteristics: These stocks offer a source of regular income and tend to perform well during bull markets, providing stability during bear markets.
- Examples (as per the article): REC, PFC, HUDCO, Tata Steel.
- Strategy: Investors should consider high-yield dividend stocks with stability in core businesses.
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Defensive Stocks:
- Definition: Defensive stocks, also known as non-cyclical stocks, are shares of companies that remain relatively stable even during market downturns.
- Characteristics: Typically associated with sectors such as consumer staples, utilities, food, and oil, these stocks provide stability but may not see dramatic growth.
- Examples (as per the article): Hindustan Unilever, ITC, NTPC, Indian Oil.
- Strategy: Defensive stocks act as a hedge against market volatility, ensuring portfolio stability.
In conclusion, a well-balanced portfolio should incorporate a mix of these stock types to achieve optimal diversification and risk mitigation. The key lies in understanding the unique characteristics of each type and aligning them with your investment goals and risk tolerance.
