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Build a Diversified Portfolio with Different Types of Stocks

Investors AlleyBuild a Diversified Portfolio with Different Types of Stocks
This guide will explain the different types of stocks and how they can generate value for your portfolio or meet your risk-tolerance needs.
Build a Diversified Portfolio with…



Investors Alley
Build a Diversified Portfolio with Different Types of Stocks

When building an investment portfolio with stocks, investors should aim to find a mix of different types of stocks. To choose the right stocks, you’ll need to consider what types suit your risk tolerance, your short-term needs, and your long-term personal financial goals. 

And this all begins with understanding different types of stocks.

In this article, you’ll learn why it’s important to understand different types of stocks, a brief overview of stocks and how they generate value for investment portfolios, and the various ways stocks can be classified and — more importantly — evaluated. 

Why Understanding Different Types of Stocks Is Important

Investors sometimes think there are only two types of stocks: the kind you buy and hold forever and the kind that day traders gamble with. This couldn’t be further from the truth.

To invest wisely, to achieve proper diversification, and to maximize the likelihood that your investment will grow over time, it’s important to understand the different way stocks are categorized and the right way to allocate those different categories within your own portfolio.

Although every stock can experience volatility and the share price can potentially decrease in value, once you get a handle of the different types of shares, you can more easily mitigate the risk of being too heavily invested in any one type of stock.

How to Think About Stocks

Different types of stocks: bull and bear paper mache

First, to think about these types of stocks more easily, let’s begin with a review of the definition of what a stock actually is.  

What Is a Stock?

A stock represents a percentage of ownership in a publicly traded company. When you buy stock, you now essentially own small pieces of the company in the form of your shares.

When you have stock, you have ownership, or equity, in that company. That’s why you’ll hear stocks sometimes referred to as equities.

How Stocks Generate Value

Investors earn money in the stock market in a few ways. Let’s look at two of the most common. 

First, the market price of the stock can increase over time. This type of value generation is called capital appreciation.

Then, certain companies will issue dividend payouts periodically to the people that own the company’s stock. Creating this type of value is called income generation.

The Different Types of Stocks

Now onto the different types of stocks and the way analysts and market experts will discuss them. 

Stocks can be grouped in a number of ways. In this article, we’ll examine five of the most common classifications: by how the stocks generate value, by investment strategy, by risk, by industry, and by company size.

Value Generation Category: Growth Stocks vs. Income Stocks

Growth stocks and income stocks generate value in different ways and are therefore best suited for different types of investors.

Maybe you’ve seen mutual funds that advise younger individuals to be heavily weighted toward growth stocks, and as you approach retirement, the mutual fund shifts its allocation more toward income stocks. Same idea here.

When considering growth vs. income stocks, the investment advice will typically depend on how far you are from retirement. 

Growth Stocks

Growth investing, just like it sounds, is a method where the investor seeks out companies poised for long-term growth. Growth stocks will have more potential for greater return, but this of course comes with a higher level of risk.

Growth stocks are typically for younger investors who have time until retirement to wait for the stock price to appreciate in value.  

Income Stocks

The name might have tipped you off, but these stocks generate steady, predictable, and stable income in the form of dividends. Income stocks are popular with those looking for passive income and with retirees.

Income stocks are typically associated with less risk and volatility. But, you know the saying “no pain, no gain”? That’s going to apply here. Because you have less risk (pain), you’re going to see less gain in the stock price of income stocks.

Utility companies are a popular type of income stock. Other large and stable income stock companies can be found in the energy, real estate, and natural resources sectors.

Investment Strategy Category: Growth Stocks vs. Value Stocks

Another way stocks can be compared is according to the investor approach. In other words, what are investors looking for? 

In this section, you’re going to see the growth stocks we just discussed compared to a new type of stock: value stocks. But this time, growth stocks are being compared according to investor approach.

Growth Stocks

Investors seeking stocks with a strong outlook for a company’s profits will gravitate toward growth stocks. 

Value Stocks

But, again just like it sounds, value stocks are those that have a good deal of value at a certain point in time. 

These companies are typically well-known in their industries and on the more mature side. For whatever reason their stock price might seem undervalued — in relation to their own average stock price or the stock price of their competitors — at any given moment, making them a value stock. 

In other words, value investors seek companies with market pricing that feels like “a good deal.” Imagine your mother sifting through the racks at Marshalls looking for that great dress at an unbelievable price. That’s your value stock.

Risk Tolerance Category: Blue-Chip Stocks vs. Penny Stocks

Again, more pain (or risk) equals more gain. So in these two types of stocks, we’re looking at risk and reward. 

Investors with more money to risk or more time to make up any potential losses can take more chances and shoot for those higher returns. Investors who are on the more conservative side will be just fine with lower returns as long as they know their investment is on the safer side.

Blue-Chip Stocks

Blue-chip stocks are investments in companies that are financially stable and typically quite large with market capitalizations in the billions. Often an industry leader, the company is established and has been around for many years.

Typically listed on the Dow Jones Industrial Average index, the stock price of a blue-chip stock doesn’t have much room to grow. Investors will usually profit, however, from dividend payments.

Penny Stocks

Penny stocks, as the name implies, can be purchased for pennies. 

These companies have shown very little — or even zero — earnings and are very volatile. However, they may be getting a lot of attention because of new products, expansion in the right market at the right time, or even due to shake ups of management or the board of directors that promise a brighter future. 

These stocks come with a good deal of risk (potential pain) and therefore offer the chance at significant returns — and lots of gain.

Market Capitalization Category: Micro-Cap, Small-Cap, Mid-Cap, and Large-Cap Stocks

Different market caps are calculated by multiplying the company’s stock price by the total number of outstanding shares.

Generally large-cap companies tend to be more established and will have more international exposure. On the other end of the spectrum, micro-cap companies tend to be newer, riskier, offer more growth potential, and more focused on the domestic market. 

Typically, the categories breakdown as follows:

  • Micro-cap: $50 million to $300 million
  • Small-cap: $300 million to $2 billion
  • Mid-cap: $2 billion to $10 billion
  • Large-cap: $10 billion to $200 billion

Volatility Category: Cyclical Stocks vs. Defensive Stocks

Every economy tends to experience periods of cyclical expansion and contraction. During times of prosperity, business booms. During times of economic recession, business suffers. Cyclical stocks ride the tide with this cyclical movement. And defensive stocks won’t even step foot on the beach — never mind get near the water.

Cyclical Stocks

Any public company that provides luxury items will ebb and flow with economic upswings and downturns. 

For example, travel is a luxury, so the travel industry is a cyclical stock. 

Remember when companies in the travel industry were crushed by COVID-19? Once the pandemic is behind us, every person and their brother will want to travel. At that point, stocks in the cyclical travel industry will likely be poised to explode.

Cyclical stocks operate like growth stocks — higher risk in exchange for the potential for higher rewards.

Defensive Stocks

In stark contrast, defensive stocks strive to be non-cyclical stocks. These stocks won’t typically see those significant swings between prosperity and recession. 

Why, you ask? Because defensive stocks are backed up by companies that offer essential products and services. Grocery store chains and utility companies are examples of companies that provide these kinds of necessities. During times of hardship, people will continue to need food, water, and electricity.

Defensive stocks are going to operate more like income stocks — paying dividends and offering lower returns in exchange for that lower risk. 

Which Different Types of Stocks Are Right for Your Retirement Portfolio?

Man reading from his laptop

Investing in stocks is one of the most important pathways to financial success. And diversification is important for developing a strong investment portfolio. A strategic combination of different stock types will help achieve that kind of diversity. Striking the right combination is where the magic happens.

You’re taking the right steps by educating yourself in order to make good investment choices. To learn more about stocks that could provide a strong foundation for your retirement portfolio, subscribe to Investors Alley’s “Dividend Hunter” newsletter.

Build a Diversified Portfolio with Different Types of Stocks
Investors Alley Staff

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Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citize



Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid 'Green Pass' Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citizens to engage in all public activity, Italy on Friday implemented its own 'Green Pass' in the strictest and first such move for Europe

The fully mandatory for every Italian citizen health pass "allows" entry into work spaces or activities like going to restaurants and bars, based on one of the following three conditions that must be met: 

  • proof of at least one dose of Covid-19 vaccine

  • or proof of recent recovery from an infection

  • or a negative test within the past 48 hours


It's already being recognized in multiple media reports as among "the world's strictest anti-COVID measures" for workers. First approved by Italian Prime Minister Mario Draghi's cabinet a month ago, it has now become mandatory on Oct.15.

Protests have been quick to pop up across various parts of the country, particularly as workers who don't comply can be fined 1,500 euros ($1,760); and alternately workers can be forced to take unpaid leave for refusing the jab. CNN notes that it triggered "protests at key ports and fears of disruption" on Friday, detailing further:

The largest demonstrations were at the major northeastern port of Trieste, where labor groups had threatened to block operations and around 6,000 protesters, some chanting and carrying flares, gathered outside the gates.

    Around 40% of Trieste's port workers are not vaccinated, said Stefano Puzzer, a local trade union official, a far higher proportion than in the general Italian population.

    Workers at the large port of Trieste have effectively blocked access to the key transport hub...

    As The Hill notes, anyone wishing to travel to Italy anytime soon will have to obtain the green pass: "The pass is already required in Italy for both tourists and nationals to enter museums, theatres, gyms and indoor restaurants, as well as to board trains, buses and domestic flights."

    The prime minister had earlier promoted the pass as a way to ensure no more lockdowns in already hard hit Italy, which has had an estimated 130,000 Covid-related deaths since the start of the pandemic.

    Meanwhile, the requirement of what's essentially a domestic Covid passport is practically catching on in other parts of Europe as well, with it already being required to enter certain hospitality settings in German and Greece, for example. Some towns in Germany have reportedly begun requiring vaccination proof just to enter stores. So likely the Italy model will soon be enacted in Western Europe as well.

    Tyler Durden Sat, 10/16/2021 - 07:35

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    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China’s property crisis is gradually emerging; to this we can now add that China’s worst case energy crisi



    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China's property crisis is gradually emerging; to this we can now add that China's worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.

    Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.

    Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world's second-largest economy. Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.

    On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.

    China's three northeastern provinces of Jilin, Heilongjiang and Liaoning - also among the worst hit by the power shortages last month - as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

    Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to "secure supplies at all costs." Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.

    Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.

    Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more

    Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.

    Meanwhile, the latest Chinese "data" on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks - such as Nomura - have gone so far to predict that China's GDP is set to shrink in coming quarters.

    China, which laughably aims to be "carbon neutral" by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been "trying" to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China's electricity needs.

    Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

    China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.

    Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China


    Tyler Durden Fri, 10/15/2021 - 22:50

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    Retail And Food Sales: If It’s Not Inflation, And It’s Not, Then What Is It?

    OK, so we went through the ways and reasons consumer price increases are not inflation, cannot be inflation, are nowhere near actual inflation, and what all that really means. The rate they’ve gone up hasn’t been due to an overactive Federal Reserve,…



    OK, so we went through the ways and reasons consumer price increases are not inflation, cannot be inflation, are nowhere near actual inflation, and what all that really means. The rate they’ve gone up hasn’t been due to an overactive Federal Reserve, so it has to be something else. This is why, though the bulge has been painful, it’s already beginning to normalize. Without a persistent monetary component (in reality, not what’s in the media) the economy will adjust eventually.

    It already has. Several times, and that’s part of the problem.

    If not money, and it’s not, then what is behind the camel humps? No surprise, Uncle Sam’s ill-timed drops along with reasonable rigidities in the supply chain.

    An Economist might call this an accordion effect. One recently did:

    The closures and reopenings of different industries, coupled with the surges and lags in consumer purchasing during the pandemic, have caused an “accordion effect,” says Shelby Swain Myers, an economist for American Farm Bureau Federation, with lots of industries playing catch-up even as they see higher consumer demand.

    Not just surges and lags, but structural changes that have been forced onto the supply chain from them. With the Census Bureau reporting US retail sales today, no better time than now and no better place than food sales to illustrate the non-economics responsible for the current “inflation” problem.

    When governments panicked in early 2020, they shut down without thinking any farther than “two weeks to slow the spread.” This is, after all, any government’s modus operandi; unintended consequences is what they do.

    The food supply chain had for decades been increasingly adapted to meeting the needs of two very different methods of distributing food products; X amount of capacity was dedicated to the at-home grocery model, while Y had been set up for the growing penchant for eating out (among the increasingly fewer able to afford it). Essentially, two separate supply chains which don’t easily mix; if at all.

    Not only that, food distributors can’t simply switch from one to the other. And even if they could, the costs of doing so, and the anticipated payback when undertaking this, were and are massive considerations. McKinsey calculated these trade-offs in the middle of last year, sobering hurdles for an already stretched situation back then:

    Moreover, many food-service producers have already invested in equipment and facilities to produce and package food in large multi-serving formats for complex prepared-, processed-, frozen-, canned-, and packaged-food value chains. It would be highly inefficient to reconfigure those investments to single service sizes.

    And if anyone had reconfigured or would because they felt this economic shift might be more permanent:

    For food-service producers, the dilemma is around the two- to five-year payback period of new packaging lines. Reinvesting and rebalancing a food-service network for retail is not a straightforward decision. Companies making new investments would be facing a 40 percent or more decline in revenue. And any number of issues could extend the payback period or make investments unrecoverable. Forecasts are uncertain, for example, about the duration of pandemic-related demand shifts, the recovery of the food-service economy, and the timeline of returning to full employment.

    So, for some the accordion of shuttered restaurants squeezed food distributors far more toward the grocery and take-home way of doing their food businesses. And it may have seemed like a great bet, or less disastrous, as “two weeks to slow the spread” morphed to other always-shifting government mandates which appeared to make these non-economics of the pandemic a permanent impress.

    More grocery, less dining. Forever after.

    In one famous example, Heinz Ketchup responded to what some called the Great Ketchup/Catsup? Shortage by rearranging eight, yes, eight production lines to spit out their tomato paste in individual servings rather than bottles. CEO Miguel Patricio told Time Magazine back in June (2021) there hadn’t actually been any shortage of product, just the wrong packaging for it:

    It’s not that we don’t have ketchup. We have ketchup, but in different packages. The strain on demand started when people stopped going to restaurants and they were ordering takeout and home delivery. There would be a lot of packets in the takeout orders. So we have bottles; we don’t have enough pouches. There were pouches being sold on eBay.

    But then…vaccines. Suddenly, after over a year of the above, by April 2021 the doors were flung back open, stir-crazy Americans flew back to their local pubs and establishments (see: below) and within months, according to retail sales, it was almost back to normal again. Meaning pre-COVID.

    The accordion had expanded back out but how much of the food services supply chain had been converted to serve the eat-at-home way which many companies had understandably been led to believe was going to be a lasting transformation?

    Do they undertake even more costly and wasted investments to go back? Maybe they resist, just shipping what they have even if not fully suited in the way it had been before all this began.

    Does Heinz spend the money to reconfigure those same eight production lines so as to revert to producing their ketchup in bottles? Almost certainly, but equally certain they’re going to take their sweet time doing it; milking every last ounce of efficiency – limiting their losses, really – they can out of what may prove to have been a bad decision (again, you can’t really fault Mr. Patricio for being unable to predict pandemic politics).

    Rancher Greg Newhall of Windy N Ranch in Washington likewise told NPR that he has the animals, beef, pork, lamb, chicken, goat, but distributors are caught in the accordion (Newhall didn’t use that term):

    NEWHALL: People don’t understand how unstable and insecure the supply chain is. That isn’t to say that people are going to starve, but they may be eating alternate meats or peanut butter rather than ground beef.

    GARCIA-NAVARRO: Newhall says he hasn’t had any issues raising his animals. It’s the processing and shipping that’s the bottleneck, as the industry’s biggest players pay top dollar to secure their own supply chains.

    The usual credentialed Economist NPR asked for comment first tried to blame LABOR SHORTAGE!!! issues, including those the mainstream had associated with the pandemic (closed schools forcing parents to stay home, or workers somehow deathly afraid of working in close proximity with others) before then admitting:

    CHRIS BARRETT: And there’s also the readjustment of the manufacturing process. As restaurants are quickly opening back up, the food manufacturers and processors have to retool to begin to supply again the bulk-packaged products that are being used by institutional food service providers.

    With US retail sales continuing at an elevated rate, the pressures on the goods sector are going to remain intense.

    Because, however, this is not inflation – there’s no monetary reasons behind the price gouge – the economy given enough time will adjust. And it has adjusted in some ways, very painful ways.

    Painful in the sense beyond just hyped-up food prices and what we pay for gasoline lately, the services sector has instead born the brunt of this ongoing adjustment. Consumers have bought up goods (in retail sales) at the expense of what they aren’t buying in services (not in retail sales); better pricing for sparsely available goods stuck in supply chains, seeming never-ending recession for service providers.

    According to the BEA’s last figures, overall services spending remains substantially lower than when the recession began last year. And it shows in services prices which had been temporarily boosted by Uncle Sam’s helicopter only to quickly, far more speedily and noticeably fall back in line with the prior, pre-existing disinflationary trend following a much smaller second camel hump.

    Once the supply and other non-economic issues get sorted out, we would expect the same thing in goods, too. It is already shaping up this way, though bottlenecks and inefficiencies are sure to remain impediments and drags well into next year.

    Those include other factors beyond food or domestic logistical nightmares. Port problems, foreign sourcing, etc. The accordion has played the entire global economy, and in one sense it has created the illusion of recovery and inflation out of a situation which in reality is nothing like either.

    That’s the literal downside of transitory. We can see what the price bulge(s) had really been, and therefore what it never was.

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