If you’re just starting to explore the world of stocks and shares, you’re probably wondering how to figure out which stocks to buy and which ones to steer clear of. It’s best to start by looking at the different types of stock classifications that exist, because this helps to divide the stocks into specific categories.
To this end, we’ve listed some of the most popular classifications here. You’ll find you start coming across these terms as you start considering which stocks to invest in.
Small, mid and large cap
‘Cap’ stands for capitalization. To work out the capitalization of a particular stock, you take the volume of outstanding shares and multiply that figure by their actual price. Small cap usually means the capitalization is under a billion dollars; mid means one to five billion dollars and large is anything over that.
Blue chip stocks
This is one phrase most people will be aware of, regardless of whether they have been involved in buying stocks or not. A blue chip stock is one released by a blue chip company, i.e. a company that has been around for a long time and which consistently delivers good results. They may not deliver huge profits but they are seen as reliable and they have far less chance of delivering a loss.
As the name would suggest, these stocks perform well at some times and not so well at others. Take energy stocks for instance. There will be times when there are big leaps forward in this industry, particularly with regard to green energy. At these times you can expect stocks to improve in value. However there will also be times when there is less demand for energy or poor news relating to the sector, and thus the value of stocks will go down.
Just as cyclical stocks focus on business sectors that can go up and down, defensive stocks focus on those that are more reliable. Any company that provides a staple item – such as food for example – will typically fall into the defensive stock category.
How can you get the right mix of stocks in your portfolio?
Defensive stocks will be more consistent in their returns than cyclical ones. They are reliable but having said that they won’t produce impressive returns. Cyclical stocks may produce better returns but only at certain times of the year.
Clearly a balanced portfolio is in order if you want to make the most of your returns. It will take time and effort to learn more about the different types of stocks you could invest your money in. However this time is worth spending because you stand a much better chance of receiving a good return.
It is also worth remembering there are many other different types of stocks – hundreds of different classifications – you could delve into. The ones listed here are some of the main ones, providing a good starting point to work from when you are just getting involved in the stock market.