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Which type of stocks suits you best?

  • June 24, 2021

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Investing in shares has historically been one of the best ways to achieve financial success. If you’re considering giving it a go, you will find that there are different categories and classifications of stocks you can take advantage of to make your capital grow. Let’s have a look at 4 of the most popular types of stocks you should know about - penny stocks and blue chips, as well as growth and value stocks.

Stocks categorized by market capitalization

When stocks are categorized by the worth of their shares (market capitalization), investors can find large-cap, mid-cap, as well as small-cap. Let’s have a look at penny stocks (small market cap) and blue chips (large market cap).

Penny stocks

Usually defined as cheap stocks (generally worth less than $5), penny stocks represent companies with small market capitalization can either be traded on significant stock exchanges, or over-the-counter. Penny stocks are quite volatile, which means that traders can make a profit (or a loss) quite quickly. These stocks are therefore a great option for traders with high risk-tolerance. They are also useful for traders that can only invest a small amount of money. Penny stocks traders are usually looking to find tomorrows success in trendy industries, like biopharmaceutical and marijuana, with small initial trading capital.

Learn more about how to use penny stocks in your trading with this guide.

Blue chips

Blue chips are the opposite of penny stocks, as they usually represent a company with large market capitalization. These firms are multinationals that are relatively safe to invest in and well established in their market. They’ve reached a certain maturity and have strong leadership in their sectors, leading to stable revenues and a certain resilience during economic downturns, which is why they’re so popular among retail traders. Blue chips usually distribute consistent dividends over the years and are not very volatile stocks.

Learn more about how to use blue chip stocks in your trading with this guide.

Stocks categorized by investment methods

There are also types of stocks that are better suited for certain investment strategies. You should therefore define your financial goals and what you want to achieve with your portfolio, so then you can select the best stocks. Let’s have a look at growth and value stocks.

Growth stocks

Growth stocks are useful for investors and traders looking for popular growing firms offering great potential returns. They are fast-growing companies that are trendy, leaders in their market, and with strong growth prospects. With growth stocks, investors are taking advantage of rising stock prices rather than dividend distributions, as these companies reinvest each dollar in their business to support their growth, which means that they do not distribute dividends. Growth stocks can be quite volatile and sometimes overvalued, which is why theyre considered risky.

Value stocks

Value stocks are usually stocks that represent a mature company, distributing dividends every year, and whose stock price is sometimes under-valued compared to their fundamentals and their market share in their industry. As value stocks represent more mature and stable companies, their stock price isnt as volatile as growth stocks. Thats why theyre considered less risky. Investors will hold them to benefit from consistent rising dividends over time, rather than a strong stock price increase.    

Learn more about why you should consider value stocks with this guide.

Which type of stock is the best?

There is no “best” choice, and no unique answer to determine which kind of stock is the best, as it all comes down to your trading strategy and financial goals. You should therefore first determine your investment style and the reasons why you’re investing in the markets in the first place to find out which kind of stocks are best for your trading strategy.

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