Just like no two companies operate in the same way or follow the same business approach, categorising all publicly listed shares in one basket is a bad idea when it comes to overall portfolio construction and your stock market investment strategy.
Understanding the different types of stocks available based on factors such as their company size, financial performance, operational dynamics like geographic market or industry, and other unique characteristics, like their propensity to regularly pay dividends can help you make informed investment decisions and reduce portfolio risks, such as concentration risk or geographic risk.
Company size
Classifying stocks according to company size is generally the most common approach, with companies rated according to market capitalisation, or ‘cap’. This figure represents the total monetary market value of a company’s outstanding shares and is calculated by multiplying the current company share price by the total number of outstanding shares.
Large-cap stocks include companies with a market capitalisation in the billions. They are often established, stable companies with a proven track record. Global large-cap stocks include Apple (AAPL-NASQ), Alphabet (GOOG-NASQ) and Nvidia (NVDA-NASQ). South African large caps include Naspers (NPN-JSE), FirstRand (FSR-JSE), and Anglo American (AGL-JSE). Well-established companies with a large market capitalisation are also often referred to as blue-chip stocks.
Mid-cap stocks include companies with a market capitalisation between small and large-cap stocks, which is in the region of $2 billion and $10 billion. They typically offer a balance of growth potential and stability, which makes them a popular option for portfolio diversification. Examples include Align Technology (ALGN-NASQ) and Libstar Holdings (LBR-JSE).
Small-cap stocks are relatively young companies with smaller market capitalisations. They tend to have a higher risk profile but offer higher potential returns.
Income-generating stocks
Income stocks provide regular income to investors by distributing a company’s profits, or excess cash, through dividends that are higher than the market average.
Investors like to include stocks that consistently deliver dividend payments in portfolios as they provide a steady income stream, which is beneficial for investors like retirees or those seeking supplemental income sources.
Examples of good dividend-paying stocks include Procter & Gamble (PG-NASQ), Johnson & Johnson (JNJ-NASQ), Coca-Cola (KO-NASQ) and Wells Fargo (WFC-NASQ). Utilities, real estate investment trusts (REITs), and some consumer staples also fall into this category.
When it comes to dividend stocks, individual and institutional investors may opt for preferred stock over common stock, as these shares give holders regular dividend payments before dividends are issued to common shareholders, but do not provide voting rights.
Banks like Bank of America Corp. (BAC-NASQ), Citigroup Inc. (C-NASQ) and JPMorgan Chase & Co. (JPM-NASQ) are typically the biggest issuers of preferred stock.
Sector-related stocks
Industrial stocks include companies involved in manufacturing, processing, and distributing goods. Examples include heavy machinery makers like Deere & Company (DE-NASQ), chemical manufacturers like AECI (AFE-JSE), and construction materials providers like PPC (PPC-JSE).
Consumer discretionary stocks include companies that sell products and services that consumers may choose to forego during economic downturns. Examples include automobile makers like BMW (BMWD-TRQX), electronics manufacturers like Apple (AAPL-NASQ), and restaurants like Famous Brands (FBR-JSE).
Consumer staples stocks sell essential goods and services that are less affected by economic conditions. Examples include food retailers including Shoprite Holdings (SHP-JSE), beverage makers like Anheuser-Busch InBev SA/NV (ANH-JSE), and personal care product providers like Unilever PLC (ULVRL-TRQX).
ESG stocks
For investors who want to do good for society or the environment while earning a fair return, select company stocks based on their Environmental, Social and Governance (ESG) credentials.
The environmental aspect relates to how a company manages its environmental impact, such as reducing carbon emissions, waste management, and resource conservation.
How a company treats its employees, customers, and the communities within which it operates, considering elements such as racial and gender diversity and inclusion, fair labour practices, and product safety fall into the social category.
Good governance relates to how a company is managed and directed, including board structure, executive compensation, and shareholder rights.
Popular ESG-aligned stocks include electric vehicle (EV) manufacturers like Tesla (TSLA-NASQ) and Aptiv (APTV-NASQ), companies focused on environmental sustainability like Xylem (XYL-NASQ), a leader in developing innovative water solutions through smart technology, and NextEra Energy (NEE-NASQ), the world’s largest producer of wind and solar energy.
Economy-linked stocks
Defensive stocks include companies that can grow earnings no matter the stage of the market cycle.
These companies have durable operations that can keep growing in either tough or favourable conditions, exhibiting little sensitivity to the economic cycle.
These companies typically operate in essential industries like consumer staples, such as companies selling everyday necessities like food, drinks and household goods. Examples include Nestle (NESNZ-TRQX)), PepsiCo (PEP-NASQ), Costco Wholesale Corporation (COST-NASQ) and Colgate-Palmolive (CL-NASQ).
Companies that provide essential services and utilities like electricity and water are not affected by shifts in consumer and business demand because these are non-discretionary expenses. Examples of these stocks include Dominion Energy Inc (D-NASQ), National Grid (NGL-TRQX) and Engie SA (ENGIP-TRQX)
In contrast, cyclical stocks are strongly influenced by economic cycles. Their performance tends to correlate with economic growth. Examples include automotive stocks like General Motors (GM-NASQ) and construction businesses like Aveng (AEG-JSE).
