Beginner’s Guide Part 7: What are the different types of stocks?

There are different types of shares that one can put their money into. We will focus on:

1. Dividend stock
2. Growth stock
3. ETFs
4. Speculative stock

Dividend or income stocks:

As their name suggests, these are stocks that have a history of paying dividends. These dividends are often higher than average dividends. Dividend stocks pay dividends year in and year out. Some every quarter, month or even week.

The stocks are generally high priced and have a low growth rate. These stocks are also less volatile than other stocks.

You should be having these stocks if you are looking for regular and passive income from shares.

Dividend stocks can come from any industry, but often they come from real estate (REITs, energy sectors, utilities, natural resources, retail and financial services such as banks and insurance companies. In some countries, REITs are required to pay dividends to shareholders each year to maintain their tax status. A case in mind is Hammerson, a UK property company. Recently they paid dividends where they gave shareholders an option for cash dividends or dividends in the form of more shares (sometimes it makes sense to opt for more shares…)

You should be holding these stocks if you are looking for a steady flow of passive income. or where you want exposure to the company’s profit share.

Growth stock:

The name gives its definition away. You are holding this stock because you expect the stock to grow over time. Obviously, it is a high risk stock.

A growth stock is any share that is expected to grow at an above-average growth rate, significantly above market averages. These stocks are expected to grow sales and earnings at a rate that is above/faster than the average market rates. It can be because it has a ground breaking product or a new technology…

Unlike dividend stocks, growth stocks do not normally pay dividends. The rationale is simply that they would want to reinvest any profits/earnings into growing the stock. Also, these tend to be more volatile than dividend stocks.

If you are looking to buy growth stocks, you want to buy them at a time when the price is below the true/intrinsic value of the company. You want to sell or move on when the share price falls above the true/intrinsic value of the company.

Examples of growth stocks are found in many sectors, mostly technology sectors in our time.

ETF (Exchange Traded Funds)

According to Investopedia: An exchange-traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other assets, but which can be purchased or sold on a stock exchange the same as a regular stock.

If this confuses you just remember that:

• An ETF is a basket of shares that can be traded on an exchange just like shares
• ETFs are generally less risky than individual stocks.
• ETFs can have all sorts of instruments from shares, commodities, bonds etc
• The transaction fees are relatively lower than when buying individual stocks.

You should be holding ETFs if you are a beginner and/or if you are not a big risk-taker. The biggest advantage of ETFs is that they are diversified and can be of low cost. This means everyone, not just beginners, can have them. I know some people who only invest in ETFs as part of their investment plan/strategy.

Speculative stocks:

We will address the difference between speculation and investing later in the next few chapters.

But, a speculative stock is one where the holder, essentially a trader, uses the stock to speculate the direction that stock may take. He/she does this using technical and fundamental analysis. By nature, the trader stays in the market for the short term as opposed to the long term. As soon as they hit the desired target, they move on or as soon as they lose a certain amount because their analysis was wrong they move on.

Key things to remember here are:

• Speculative stocks are quite risky or what one could call high risk, high rewards stocks
• Speculative stocks require a lot of time and effort
• Speculative stocks are more for short term traders rather than long term investors.
• If you are a beginner, stay away from these stocks. The risk is too high, you may end up losing all your capital.

Are you learning anything from this series? Do you want to share any pointers or experiences?

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