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
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.