Because investing in stocks has historically been one of the best ways to create wealth over time and reach your financial goals (and even your financial freedom), you’ve probably already dived into researching the best stocks to invest in and discovered that there are different categories of stocks you can take advantage of.
Let’s have a look at the most important types of stocks, like growth stocks, value stocks, defensive stocks, and cyclical stocks, so you can decide which one(s) you should add to your portfolio.
Growth stocks usually represent companies whose sales and profits rise quickly.
Because they want to finance their growth, these companies usually do not redistribute dividends to their shareholders. They prefer to re-invest every dollar to support the projects that will support their growth over time.
The best growth stocks are usually those in a niche industry within a growing market, coupled with a strong brand, innovative ideas, and high barriers to entry, like the tech sector.
- Growth stocks offer large potential returns because they represent big, trendy, and fast-growing companies with increasing profits.
- They usually take advantage of strong and rising demand.
- These stocks usually outperform during bullish markets.
- Growth stocks are considered riskier stocks.
- They are usually expensive stocks (they can often even be overvalued by the market).
- Competition in these industries can sometimes be fierce.
- Those companies are trendy and can fall from favor very quickly.
- Usually, growth stocks do not distribute dividends.
- These stocks usually underperform during bearish markets.
- These companies can record financial losses, despite the stock price appreciation.
Some growth stocks in 2022
- Auto Trader Group
- Avon Rubber
Value stocks represent companies whose share price is considered inexpensive compared to their fundamentals and/or their peers, which means that their intrinsic value is lower than their market value.
These companies are often seen as more conservative investments because they represent mature companies that have already proven themselves in a specific sector or industry.
Value stocks usually distribute consistent and growing dividends, which provides a more secure and regular income for investors.
- They represent strong, steady, and established companies – often leaders in their industries.
- Less risky stocks than growth stocks.
- Dividends provide a stable income.
- Room for price appreciation is limited.
- A cheap stock doesn’t necessarily mean that it is worth buying. Be careful of value traps.
Some value stocks in 2022
- Goldman Sachs Group
- Gilead Sciences
- Oakley Capital
- Royal Mail
- Caretech Holdings
- Hikma Pharmaceuticals
Also known as secular or non-cyclical stocks, defensive stocks usually represent companies that are profitable regardless of the state of an economy, because they sell goods and services that no one can live without.
Because they’re less sensitive to economic and business cycles, non-cyclical stocks are considered more solid when the economic situation is deteriorating. Moreover, their stock price doesn’t experience significant swings, so losses will be smaller when the economy is slowing down, but gain will be limited (or at least lower) when the economy is doing well.
Companies offering food, beverages, household & personal products, health services, as well as electric, gas, and water are examples of non-cyclical stocks – because no matter how the economy is doing, people still need to eat, drink, wash themselves, and receive medical treatment.
- Non-cyclical companies tend to have relatively stable profits over time, which provides a more reliable return.
- They are less economically sensitive than cyclical stocks.
- They are more stable and less risky stocks to bet on because they are decoupled from the economic situation.
- They act as anti-cyclical stocks to hedge against market uncertainty and volatility, when the economy is slowing down or when growth prospects are unclear.
- These companies usually offer stable dividends.
- Non-cyclical companies usually offer lower profit growth potential over the longer-term than cyclical stocks.
- They tend to under-perform when the economy is doing well and the stock markets are rising.
Some defensive stocks in 2022
- Procter & Gamble
- Johnson & Johnson
- UnitedHealth Group
- British American Tobacco
- Reckitt Benckiser Group
Cyclical stocks represent companies that have exposure to business cycles, meaning that they follow expansion and contraction cycles. Therefore, they tend to perform better during periods of prosperity and poorer in times of recession.
These types of stocks can experience big swings in demand, depending on how well an economy is doing. In a strong economy, people tend to make purchases quickly and spend more, while in a contracting economy, people tend to postpone their purchases to reduce their expenses.
Companies in industries like automobile manufacturers, consumer services, luxury goods, financial sector, retail, transportation, as well as travel & leisure, are examples of cyclical sectors. But you can include any sector selling goods and services seen as a discretionary expense.
- These stocks are easily identifiable.
- When the economy is doing well, these stocks will outperform the rest of the market.
- If the timing is right, you can potentially increase your returns by benefiting from strong growth if an economy is strengthening, as cyclical stocks have greater growth and profit potential.
- High volatility can be a great advantage if you’re a short-term trader and you know how to exploit price swings.
- These companies are highly sensitive to business cycles and the global health economy, so they usually underperform when economic growth slows down.
- They can be very volatile stock prices, which means that they are riskier stocks.
- It can be challenging to predict an upswing, so buying cyclical stocks involves a lot of research and understanding of how market and business cycles work.
- Successful investing strategy in cyclical companies requires good and careful timing.
Some cyclical stocks in 2022
- Boeing Company
- Air France KLM
- British Airways
- Burberry Group
- Intercontinental Hotels Group
- ASOS Group
How to choose the right type of stocks for your trading
You’re probably wondering by now which type of stocks make the best investments. Well, it all depends on your financial strategy, your trading goals, and your risk appetite, as well as economic prospects and the economic cycle we’re in.
The best approach would be to add a variety \of stocks from each category to your portfolio – that way you’ll be prepared for all situations and be sure you can still profit from the stock markets over time. Portfolio diversification is key to mitigating your risk!
If you’re an active trader, you can consider any of these stocks, as long as there is volatility, which usually depends on the current economic environment.
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