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Which Stock Types to Buy

Choose your stock asset classes to invest in. Stocks come in all shapes and sizes.  They vary from the amount of risk they offer, the growth rates, the products they sell, the markets they cover, and on nearly every other aspect that you can think of.  There are many different asset classes to consider when figuring out which types of stock to buy.  Here, we'll cover some of the most common ones.

Breakdown of the different stock asset classes to buy

Least Risky Stocks to Buy.  The least risky stocks to buy are the well diversified mutual funds that are in stable sectors.  Stable sectors include companies with large market capitalizations, mature companies, dividend paying companies, and especially companies such as utilities or other non-cyclical and stable businesses.  These types of stocks are also known as low beta stocks.  Low beta means that the stocks do not move as much as the market.  For example, if the market fell 10% in a week, stocks with a beta of 0.5 would fall only one half of the 10%, or 5%.  Because they are less volatile than the market, these stocks are considered less risky.

Medium Risk Stocks.  Stocks that have more exposure to companies that are more volatile or faster growing are considered medium risk investments.  Stocks that fit the categories of growth stocks and value stocks typically fall into this category.  Medium risk stocks are usually well known companies and medium to large cap stocks that are fairly stable but that can have large swings when the market itself swings.  Medium risk stocks carry betas close to 1.0, which means that they typically move up and down about the same amount as the overall market.  There are many mutual funds and exchange traded funds (ETFs) that cover these market sectors, so if you are looking for medium risk stocks it is very easy to find them.

High Risk Stocks.  If you are interested in maximizing your returns, you may be drawn to the high risk stocks.  These stocks often move much more than the overall market, whether it be on the upside or the downside.  That means they have high betas, usually exceeding 1.5 or more.  High risk stocks are often high growth stocks or stocks in emerging markets.  In the 1990s, technology stocks were high risk.  In the early 2000s, Internet and biotech stocks were high risk.  In the 2010s, social networking  and cloud computing stocks are high risk.  As new technologies and business models emerge, they are almost always high risk until they establish growth and profitability.  That's because investors are always looking for the next big name to make them rich.  This exuberance makes high risk stocks very volatile.

Ultra High Risk Stocks.  Beyond high risk is a category of stocks that should be avoided by all investors.  That's because these stocks are really just speculative.  These stocks are called penny stocks.  Penny stocks are ultra volatile, are easily manipulated, and the trading of penny stocks is filled with fraud and deceit.  While less than 1% of all penny stocks actually become legitimate stocks, the other 99% eventually get delisted.


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