WHAT ARE DIFFERENT TYPES OF STOCKS? PART 3

Stocks on the basis of risk:
Some stocks are riskier than others. This is because their share prices fluctuate more. However, just because a stock is risky does not mean investors should avoid it. Risky stocks have the potential to make you greater profits. Low-risk stocks, in contrast, give you lower returns.

Blue-chip stocks:
These are stocks of well-established companies with stable earnings. These companies have lower liabilities like debt. This helps the companies pay regular dividends.

Blue-chip stocks are thus considered safe and stabile. They are named after blue-colored chips in the game of poker, as the chips are considered the most valuable.

Beta stocks:
Analysts measure risk – called beta – by calculating the volatility in its price. Beta values can have positive or negative values. The sign merely denotes if the stock is likely to move in sync with the market or against the market.

What really matters is the absolute value of beta. Higher the beta, greater the volatility and thus more the risk. A beta value over 1 means the stock is more volatile than the market. Thus, high beta stocks are riskier. However, a smart investor can use this to make greater profits.

Stocks on the basis of price trends:
Prices of stocks often move in tandem with company earnings. Stocks are thus classified into two groups:

Cyclical stocks:
Some companies are more affected by economic trends. Their growth moderates in a slow economy, or fastens in a booming economy. As a result, prices of such stocks tend to fluctuate more as economic conditions change.
They rise during economic booms, and fall as the economy slows down. Stocks of automobile companies are the best example of cyclical stocks.

Defensive stocks:
Unlike cyclical stocks, defensive stocks are issued by companies relatively unmoved by economic conditions. Best examples are stocks of companies in the food, beverages, drugs and insurance sectors.
Such stocks are typically preferred when economic conditions are poor, while cyclical stocks are preferred when the economy is booming.