Stocks are categorized in several ways, so to know which ones are the good types of stocks to invest in, you need to understand a little about these categories. Investors trade stocks by size, type, region and index, and the more you learn about trading stocks, the more diverse you can make your portfolio. Learning enough about a stock to decide on investing in it takes time, and learning enough about an entire portfolio takes even more time. A lot of investors save themselves the time of researching stocks by investing in funds, such as index or mutual funds.
When it comes to the types of stocks investors trade, they’re typically broken down into market capitalization, growth rate and industry. Diversifying a portfolio is a matter of choosing stocks from companies of different sizes, from different industries and experiencing different rates of growth. This strategy prevents the entire portfolio from losing value if one sector of the economy starts performing poorly.
How Are Stocks Categorized by Style, Size and Sector
A stock’s style refers to its rate of return, and stocks that are experiencing faster-than-average growth are put into the growth category, according to CNN Money. Stocks that are experiencing normal growth are put into the value category. Growth and value stocks each have their purposes, and some investors will want to invest mainly in one or the other. Risk-averse investors, in particular, tend to invest in value stocks, which carry less risk of tanking than growth stocks.
When investors categorize stocks by size, they sort them by small, middle and large capitalization, or small-cap, mid-cap and large-cap for short. A stock’s size coincides with its growth rate as smaller companies typically grow more quickly than larger ones. For example, a company with tens of billions of dollars of market capitalization would most likely be a value stock, while a smaller firm would be more likely to grow at an above-average rate. Investors looking for a diverse portfolio should research stocks with different market capitalization as well as growth rate.
The best way to diversify a portfolio is to buy stocks from different sectors. For example, rather than buying 10 stocks from green tech startups, a selection of stocks from the energy sector, health sector, retail sector and other sectors would help buffer sudden losses caused by changes in the economy. The easiest way to buy stocks across a wide range of sectors is to invest in an index fund, which simply puts money into stocks from an entire index, such as Standard and Poor’s 500.
Judging Your Willingness to Take Risks
The stocks you invest in should reflect how much risk you’re willing to take, according to NASDAQ. If you don’t feel comfortable losing 10 percent of your investment in a single day, you shouldn’t put all your money in small, dynamic, high-growth stocks. The opposite side of this argument is that you can’t expect to earn 10 percent of your investment in a single day without taking this risk, either. Investors who plan to hold onto their stocks for many years or decades should do their best to create a diverse portfolio, adding to it as they find interesting, new companies.
The trick to buying the best stocks is researching the companies in which you plan to invest. Understanding good types of stocks to invest in is a matter of knowing your interests and tolerance of risk.