3 Types Of Stocks To Invest In

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In this article, we will discuss the 3 types of stocks that you can invest in and how they differ from each other. When investing in stocks, one of the first questions you would (or will) ask is: what type of stock do I select?

Selecting the type of stock depends on a multitude of factors. Some of the important ones are:

• Age
• Financial Goals
• Risk Appetite
• Investing Timeline
• Compounding Impact
  

Hence, the answer will be different for every individual as to what type of stocks to buy and invest in. So, it becomes imperative that you understand your financial goals and risk appetite (especially) and decide accordingly.

Now, let’s look at the 3 types of stocks.

Growth Stocks

What is considered a growth stock?

As the name suggests, growth stocks are those that grow at a faster or higher pace than a benchmark. Typically this benchmark is the stock market, and the speed of growth is measured against the average rate of the market.

The expectation from a growth stock is that the company will generate substantial revenue and therefore substantial cash flow at a pace higher than its competitors.

The catalyst(s) for higher growth could be new technology, breakthrough innovation, competitive advantage, international presence and(or) technology patents to name a few.

How do you know if a stock is growth stock?

Growth stocks usually have a higher P/E (price to earnings) ratio. P/E ratio indicates how much you would expect to in a company in order to receive one dollar of the company’s earnings.

This means that growth stocks are priced higher in the stock market because you as an investor expect the company to grow rapidly. This willingness creates something called an overvalued stock.

In simple terms, it means that the stock of the company is valued over a certain threshold that cannot be justified by its outlook/guidance.

Do growth stock pay dividends?

Growth companies usually pay little to no dividends. The reason for this is, they want to invest every dollar of profit back into the business to continue fueling the rapid growth.

Hence, as an investor, sometimes your only opportunity to make money from growth stocks is when you sell your shares.

Now, if the company does well, you might get your returns, but if not, you incur a significant loss (depending on how much you invested)

How risky are growth stocks?

Investing in growth stocks is considered risky because the returns are dependent on the high growth fast paced nature of the company & industry.

Growth companies are in constant pressure to show performance that beats their competitors and market expectations.

While the pressure is considered healthy, if the company fails to perform or meet expectations, it could deal a serious blow to the stock price, therefore wiping out your capital gains.

So, it is essential that you do not invest in companies that are relatively new with a limited track record if risk-averse. On the other hand, if you like to take risks and have the capital to invest, you want a higher % of your portfolio in growth stocks.

How do growth stocks perform?

Growth stocks have the capability to beat/outperform the entire market over time. This provides a huge opportunity as well as a challenge for companies that are considered growth oriented.

Because of the potential to outperform the market, you could potentially see growth in double digits in terms of %

Examples of growth stocks

Below is a list of few companies you might recognize as growth stocks:

• Comcast (CMSA)
• Amazon (AMZN)
• Dropbox (DBX)
• Salesforce (CRM)
• Verizon (VZ)
• AT&T (T)
  

Value Stocks

What is considered a value stock?

Value stocks are those that trade at a price relatively lower vs. the company’s performance. In other words, if company A is performing good and you’d expect the stock price to trade at let’s say $100, it might be trading at $80.

The lower trading price comes from the fact that value stocks are stocks of companies that are not considered favorable in the market.

The unfavorability comes from temporary business slowdown or adverse events or trade wars between countries or legal battles amongst other factors.

How do you know if a stock is value stock?

Value stocks usually have a lower P/E ratio as they are trading at a lower price in the market. This means that you as an investor is expecting the stock price to go up (hence called value stock) in the near future.

They also have high dividend yield, meaning companies pay higher dividend vs, others for each share you own as an investor.

 In simple words, value stocks are trading at a price lower than the benchmark and this creates opportunities.

Do value stock pay dividends?

Yes, value stocks do offer dividends and some companies pay a lot more vs. others. A dividend is one of the levers used by companies in the value sector to attract investors.

Given that the price of the value stock is trading lower, dividends become a crucial corporate lever and hence the high dividend yield.

How risky are value stocks?

As you know, value stocks trade at a lower price in the market and hence, at times, are available at a bargain. This makes it even more challenging for a value company to impress the investors and to change the perception of the market.

One way it can change the market perception, is by consistently providing better than expected performance and future guidance.

As a result, the inherent risk of better than expected performance and changing the market perception makes value stocks riskier than growth stocks.

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How do value stocks perform?

Given the increased risk of owning a value stock, it is imperative to track the performance on a regular basis. Depending on the market conditions and your personal goals, you need to adjust your portfolio for value stocks.

Remember, for a value-based company to achieve consistent results and provide a promising outlook, it takes time.

For this reason, expecting higher returns on a short-term basis is not realistic, and you will require patience with value stock investing.

Examples of value stocks

Below is a list of few companies you might recognize as growth stocks:

• Kohl’s Corporation (KSS)
• Target (TGT)
• CVS (CVS)
• Coca-Cola (KO)
• General Mills (GIS)
• AbbVie (ABBV)
  

Income Stocks

What is considered an income stock?

Income stocks are stocks that provide limited growth potential thereby offering regular and steady income to investors in the form of dividends.

As a result, they have a high dividend yield. These stocks have low volatility and hence, little price fluctuations daily.

Income stocks can belong to any industry but primarily found within Energy, Utility and Real Estate sectors.

How do you know if a stock is income stock?

Stocks that have stable stock price over years, reduced volatility and offer higher than market dividends are usually considered income stocks.

In some cases, the high dividend yield can generate a majority of the stock’s overall return. An ideal income stock would show a steady increase in dividends over the years.

Do income stock pay dividends?

Yes, income stocks pay regular and steady dividends as that is the key attraction to investors who are conservative. The dividends provide a stable income to the investor and hence make income stocks attractive.

Given the limited future growth potential of income stocks, offering higher dividends vs. other companies is crucial to attracting investors.

Hence, the companies strive to generate positive cash flow on an ongoing basis so that the excess cash can be passed on to the investors.

How risky are income stocks?

Income stocks have low volatility due to the nature of their business, limited growth and lower performance pressure.

Because of this, income stocks are less risky than both growth and value stocks.

The most significant risk for an income stock is not generating enough cash flow to fund those regular dividends to the investors. Investors bank on the stable stream of income from dividends, and often it is the only reason to own income stocks.

How do income stocks perform?

The performance of an income stock varies by industry but for the most part, companies show stable performances. The primary reason is that these companies have been in business for a longer period and have established operations.

Companies with income stocks need to perform consistently in order to ensure the dividend payout to keep investors happy.

Examples of income stocks

Below is a list of few companies you might recognize as growth stocks:

• BP (BP)
• Citigroup (C)
• Walmart (WMT)
• Cisco Systems (CSCO)
• Caterpillar (CAT)
• Chevron Corp. (CVX)
  

Relevant Posts:

>> 7 Types Of Investments For Beginners
>> Safe vs. Risky Investments

Growth vs. Value vs. Income Stocks Comparison

1) Stock Price

Growth stocks: they trade at a higher stock price primarily due to its higher growth potential

Value stocks: trade at a lower price (and hence the value in buying them) primarily due to the skeptical nature of future growth potential.

Income stocks: they usually trade within the expected range due to their steady nature of business
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2) Price to Earnings (P/E) Ratio

Growth stocks: these stocks have higher P/E ratio as they usually trade at a higher price in the market.

Value stocks: they have lower P/E ratio since the stock is trading at a lower price in the market.

Income stocks: they have a P/E ratio in range (stable) as the stocks generally trade in the expected range.

3) Dividend Payout

Growth stocks: these stocks usually pay little to no dividends. Due to the high growth nature of the businesses, excess profits are reinvested back to into the business to fuel future growth

Value stocks: these stocks pay good dividends in order to attract investors. Since they generally trade at a lower stock price, companies payout sizable dividends for better returns.

Income stocks: these stocks offer the best dividend payout vs. growth and value stocks. Companies classified as income stocks have stable and established operations with limited future growth potential. As a result, offering higher dividends is key to their investors.

4) Risk

Growth stocks: companies with growth stocks have higher risk due to their high growth potential leading to higher stock price for investors

Value stocks: these stocks are the riskiest as they have to overcome the skeptical nature of the markets (hence the lower price) and consistently perform better vs. market expectations.

Income stocks: they are less riskier due to their stable nature of business and lower volatility.

5) Company Performance

Growth stocks: companies with growth stocks have high pressure of performance due to high growth potential and market/investor expectations.

Value stocks: companies with value stocks have very high pressure of performance in order to overcome the skeptical nature of markets and provide consistent performance to attract investors.

Income stocks: companies with income stocks have low pressure of performance and it comes in the form of generating enough cash flow to pass on to investors in the form of dividends.

6) Growth Potential

Growth stocks: these stocks have very high growth potential and hence the classification as growth stocks.

Value stocks: these stocks have high growth potential but the growth might be impacted due to temporary market/business conditions.

Income stocks: these stocks have limited growth potential and hence offer higher dividends vs. growth and value stocks.

7) Industry Focus

Growth stocks: primary industries include Technology and Healthcare

Value stocks: primary industries include Consumer Staples and Financial Services

Income stocks: primary industries include Utilities, Energy, Natural resources and Real Estate.

Summary

In summary, the 3 types of stocks discussed above, offer investment opportunities to every type of investor. If you are risk-averse, income stocks might be the way for you or, if you are a risk taker, you might be interested in a combination of growth and value stocks.

Remember, your risk appetite and financial goals need to align with the type of stocks you choose as this will not only help you grow your money but also avoid sleepless nights.

Research about the companies you’d like to invest in and understand their business operations and how they make money (at the very least).

As a millennial, growing up through the Great Recession of 2008-2009, I learnt it the hard way that diversification is key to your overall returns (especially from stocks).

It is prudent to have a healthy mix of growth, value and income stocks in your portfolio to avoid any one or two industries/sectors negatively impacting your returns.

Personally, I live by the old adage “DO NOT PUT ALL YOUR EGGS IN ONE BASKET” and it has been my mantra for any and all investments.

What has been your experience with investments in stocks? Please share your thoughts and ask away any questions in the comment section below!