Stocks are divided into categories for specific reasons that may have a bearing on your investment decisions. Companies are most commonly divided by market capitalization but they may also be categorized as to whether they are domestic or international or whether they are focused on growth or value but for many investors that just helps to identify an investor’s risk profile.
Within any market capitalization group, stocks can fall into different sectors or industries as well, and they may be dividend stocks or growth stocks. And stocks can perform differently depending on that sector. For example, a utility stock will perform very differently than a technology stock in different conditions and they offer different risks and rewards to investors. Even within the technology sector, there are numerous distinctions in the way companies are classified. There are chip stocks and software stocks and networking stocks and consumer stocks and they all perform differently.
The lucrative mutual fund and now exchange-traded fund (EFT) industries are based on the premise of safety in numbers. Rather than try to choose individual stocks, a mutual fund or ETF invests in a group (often referred to as a “basket”) of stocks. And since their earliest days, these funds branched out into distinct funds that targeted specific sectors. For example, you could own an ETF that focuses on the technology sector.
Investing in different stock categories is an important part of a balanced portfolio. What follows is a list of specific stock categories and why investors may want to consider them as part of a balanced portfolio.
Common Types Of Stock Investments
- DOW 30 Stocks - Dow 30 stocks are stocks from the Dow Jones Industrial Average. The Dow Jones Industrial Average or DJIA is an index of 30 blue chip stocks that represent the core of the US economy.
- Large Cap Stocks - Large Cap Stocks are very large corporations whose market capitalization is more than $10 billion.
- SPACs - SPACs are Special Purpose Acquisition Companies. They are shell companies funded by an investment firm with the purpose of buying a private business and bringing it public. The EV industry made the term famous and now infamous because it is a way for start-up companies to avoid the traditional Road Show and requirement of listing.
- 5G Stocks - Any stock related to or involved with the roll-out, ramp, and future of the 5G telecommunication network.
- Biotech Stocks - The stocks of companies working in the biotech industry including clinical phase pharma stocks all the way through consumer products.
- Election Stocks - Election Stocks are stocks that are sensitive to the election cycle and may get a boost from political news.
- Electric Vehicles Stocks - EV stocks for short, these are companies that manufacture electric cars and their components.
- Gold Stocks - Gold stocks are companies that mine or produce gold for their income. Their profits are tied to the spread between gold and oil and often fluctuate counter to the dollar.
- Lumber Stocks - Lumber stocks are the stocks of companies that own timber-producing land, farm timber, or manufacture lumber products.
- Oil Stocks - Oil stocks are also known as energy stocks and include drillers, pipelines, refineries, storage centers, and downstream sales.
- Water Stocks - Water stocks are a precious commodity banking on the future water needs of the US and the world which are vast
Blue-Chip Stocks For Steady, Safe Returns
Blue-chip stocks are named after the color of poker chips that represent the highest value. But blue-chip stocks are not based on the price of the stock but rather on their quality. One of the primary characteristics of a blue-chip stock is that the company must have a market capitalization of over $5 billion dollars. These are large-cap stocks with established businesses.
Aside from the market cap requirement, blue-chip companies are companies with solid balance sheets and analysts count on these companies to deliver consistent, quarterly earnings growth that they return to their shareholders in the form of dividends. Many, but not all, blue-chip companies are dividend aristocrats or even King. This means the company has increased its dividend amount for at least 25 years, 50 years in the case of Kings.
Capital appreciation and growth is not the focus of blue chip investing. Blue-chip stocks at times do produce capital growth but that is not the primary objective for these stocks.
What Are The FAANG Stocks?
This is one of the most well-known categories of stocks and one that tracks the largest, blue chip tech companies. Unlike other categories that can be somewhat arbitrary, the group of FAANG stocks is limited and specific. FAANG is an acronym that is comprised of the first initial of an elite group of technology stocks that includes Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX), and Alphabet which is the parent company of Google (NASDAQ: GOOGL).
One common denominator of all FAANG stocks is that they trade on the NASDAQ stock exchange but they also make up approximately 1% of the S&P 500 Index, which is considered to closely approximate the broader stock market. In terms of weighting in the S&P 500, three of the five FAANG stocks are in the top ten.
In contrast to blue-chip stocks, FAANG stocks are still growth stocks. This means that these companies choose to reward their shareholders by investing their profits into growing their business as opposed to returning it to shareholders as dividends or share buybacks.
The FAANG stocks are among the most expensive stocks to own in terms of share price. And while they may represent a good value, it may be hard for the average investor to buy individual shares but that is changing. Many FAANG names have had stock splits to lower the share price.
Marijuana Stocks Are Coming Back In Favor
Marijuana stocks make up one of the most intriguing sectors in the entire stock market. Marijuana stocks became popular in 2018 based on the promise of incredible growth in the cannabis industry as many countries continue to legalize marijuana for medicinal and/or recreational purposes.
If you go on the investing app Robinhood, marijuana stocks are among the most highly traded. One of the reasons for this is that a high percentage of Robinhood users are categorized as millennials. These investors are true believers in the medicinal benefits of cannabis. And, in many cases, are simply betting on the opening up of the US recreational market.
The cannabis industry is diverse. The most well-known names among marijuana stocks are the growers such as Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB). But the industry is actually much more diverse than that. Some companies are not involved in the growing aspect at all.
Options Trading Is Not Buying Stock
Options trading is not a separate category of stocks, rather, it’s a different way of trading securities. Investors can use options to trade many types of securities.
An options trade is a contract between a buyer and a seller. The buyer of the contract purchases the right (but not the obligation) to buy or sell a quantity of stock. When a buyer enters into an options contract with the intention of buying a stock, it is known as a call option. In this case, the buyer believes the stock price will rise before the option expires and the seller will have to sell him shares at a lower price.
When the options contract is written with the intention of selling a stock, it is known as a put option. In this case, the buyer believes the stock price will decline before the option expires and the seller will have to buy shares at a higher price.
The terms of the contract include both a specified price (the strike price) and a specified date (the expiration date). The time period of an options contract can be a month, a quarter, or longer. The only condition is that the option must be exercised in a “reasonable period of time.”
Because an investor does not have the obligation to purchase or sell the stock, the owner of the contract will receive a fee. In that way, if the contract expires the owner at least collects the fee (or premium) from the expiring contract.
Another difference between options trading as opposed to trading individual stocks is that option trades must be done through a broker. Since the dot-com boom, brokers have done a better job of providing investors with educational tools that help them understand the mechanics as well as the risks of options trading.
Penny Stocks Are Worth The Time, Sometimes
According to the Securities & Exchange Commission (SEC), penny stocks are stocks that sell for less than $5 per share. Although there is no standard definition for what makes a stock a penny stock, the common trait is that these stocks sell for “pennies on the dollar” and often on the OTC exchanges.
While it’s easy to see the low cost of entry as a potential reward for a penny stock, it’s important to understand the risk that these stocks carry. Let the buyer beware is very applicable to these stocks. In some cases, a penny stock is a penny stock because it operates in a very specific niche and just doesn’t draw a lot of attention from investors. It may have few catalysts for long-term growth so there’s nothing creating demand for the company’s stock.
If a penny stock is listed on one of the major stock exchanges, it will have to meet SEC minimum filing requirements. This means investors will have access to at least the company’s basic financial information. There are many brokers that publish lists of viable penny stocks.
In many cases, a company’s stock is trading at low levels because it is in financial trouble. If a publicly traded stock on a major exchange falls below $1 for a length of time, it runs the risk of being delisted. Although many companies avoid that fate, it doesn’t always mean the company is healthy. A scenario that is even riskier is when a penny stock is listed on the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB).
In both cases, it means that the company does not have to file information with the SEC. And that means that it is impossible for investors to verify any claims that the company may make.
Real Estate Investment Trusts (REITs) For Income And Dividends
Investing in real estate is a tried-and-true investment strategy.but property management is not every investor’s strength. The intention of a Real Estate Investment Trust (REIT) is to allow investors the ability to invest in real estate without buying or financing (and managing) property. A REIT consists of numerous real estate companies that own a portfolio of income-producing real estate assets. When an investor invests in a REIT, they earn a portion of the income these assets produce.
The two categories of REITs are equity REITs and mortgage REITs. Equity REITs such as Avalon Bay Communities (NYSE: AVB) are generally for commercial properties that receive their primary income from rent payments. This is the most common form of REIT with over $2 trillion of assets under management.
A mortgage REIT is primarily composed of residential properties that are backed by mortgages or mortgage-backed securities. A mortgage REIT profits from the spread between the interest rates they earn from their mortgage loans and the short-term borrowing rates. New York Mortgage Trust (NASDAQ: NYMT) is an example of a mortgage REIT.
One of the most desirable features of REIT stocks is that they must payout at least 90% of their profits as dividends. REITs have no retained earnings.
Warren Buffett Stocks For Long-Term Success
As this category’s name states, stocks in this category are stocks owned by Warren Buffett’s hedge fund Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). Buffett has been successful because he follows an investment strategy in which he takes large positions in stocks that he believes have a high probability to grow. In 2018, the top four positions in Berkshire Hathaway’s portfolio carried over 10 percent of its weight.
His buy-and-hold strategy may not be appealing to every investor however when Buffett takes a position in a new company or buys more shares of a stock he already owns, investors generally see that as a positive sign. In fact, Buffett is famously known for quipping for investors to be greedy when others are fearful (and vice versa). One of Buffett’s core principles is that investors should invest in what you know. And that means that many Warren Buffett stocks are well-known names like Apple (NASDAQ: AAPL) and Coca-Cola (NASDAQ: COKE).