Stock Investment Strategies: Categories and Approaches

Investing in stocks is a fundamental piece in building a diversified financial portfolio.  Stocks represent ownership in a company and come in various forms, each serving different investor needs and exhibiting unique risk profiles.  Below, we take a closer look at some of the different banners/categories under which stocks are usually placed, allowing investors to build out the ideal portfolio for them more easily.

Voting Rights

Before exploring more niche categorizations, it should be understood that stocks typically fall into the following categories: common and preferred stocks.

Common stocks are the most prevalent type of stock that people invest in.  Holders of common stocks typically have voting rights at shareholders' meetings, albeit with lower priority in ownership claims and dividends compared to preferred stockholders.  These stocks are well-known for their capital growth and are subject to market fluctuations and economic changes.

Preferred stocks are a class of ownership in a corporation with a higher claim on its assets and earnings than common stocks.  Preferred shareholders typically enjoy fixed dividends ahead of common stockholders and do not usually have voting rights.  This type of stock is particularly attractive to risk-averse investors looking for steady income.

For a more detailed comparison of these stock types, check out ‘What's the Difference?‘

Performance Based

These are stocks typically chosen based on some level of expected performance.  Whether this be huge growth, steady returns, or some middle ground, performance-based stocks are plentiful.

Growth stocks are shares in companies expected to grow at an above-average rate compared to other companies in the market.  These stocks typically do not pay dividends, as the companies often reinvest earnings back into the business to fuel further growth.  Investors are drawn to growth stocks for their potential for substantial price appreciation.  However, they also carry higher risk and volatility.  Examples include technology firms like Apple or emerging biotech companies.

Make sure to learn more about some of the top ‘Tech Stocks Poised for Growth'.

Defensive stocks (or non-cyclical stocks) provide consistent dividends and stable earnings regardless of the overall state of the stock market.  These stocks are typically associated with companies whose services or products are always in demand, such as utilities, healthcare, and consumer staples.  Defensive stocks tend to be less volatile and provide a safeguard during economic downturns.

Discover some of the top ‘Defensive Stocks for Weathering Market Volatility'.

Value stocks are shares of companies that appear underpriced relative to their intrinsic value, as determined through fundamental analysis.  These stocks are often associated with companies that have fallen out of favor but still have strong fundamentals.  Investors in value stocks anticipate profits primarily from stock price appreciation as the market corrects the undervaluation.

Find more ‘Undervalued Stocks with Upside Potential' to round out your portfolio.

Income stocks are sought after for their consistent and reliable dividend payments.  The most reliable of these are known as ‘Dividend kings' – a moniker given to companies that have increased their dividends for at least 50 consecutive years.  Naturally, these stocks appeal to investors who desire a steady income stream.  Companies like Procter & Gamble and Coca-Cola fit this category.

Investing in ‘Dividend Kings' for Reliable Growth can bring stability to your portfolio.

Ideological Stocks

This stock grouping typically comprises examples based on a set of shared ideologies or beliefs—it does not necessarily represent companies with the longest record for increasing dividends or the best value proposition.

Halal stocks represent companies whose business activities are compliant with Islamic law.  This involves avoiding companies that profit from gambling, alcohol, pork, and usury.  Halal stocks must also pass certain financial ratios regarding debt and interest earnings.  They are particularly important for Muslim investors following Sharia law but also appeal to ethical investors who prefer socially responsible investing.

Increasingly, access to Halal stock portfolios is being made possible through platforms like WealthSimple as ideological investing grows in popularity.

ESG stocks are part of companies that adhere to Environmental, Social, and Governance criteria.  The appeal of ESG stocks lies in the belief that companies committed to sustainable practices may have lower financial risks and better long-term prospects.  This category of stocks has gained popularity as global awareness of sustainability issues grows.

Renewable Energy Stocks are a perfect example of investing within an ESG framework.

Geographical and Sector-Based Stocks

Sector stocks represent companies within the same industry or economic sector, offering a way to invest in particular economic segments.  Investors might focus on technology, healthcare, financial, industrial, and energy stocks.  Investing in sector stocks allows individuals to capitalize on the growth of specific economic sectors.

Geographical stocks refer to companies primarily operating in specific regions or countries.  This categorization allows investors to target investments based on geopolitical and economic conditions unique to certain areas.  For example, investors might choose stocks in emerging markets for growth potential or in developed markets for stability.

Investing in International Stocks for Global Diversification can provide growth and stability simultaneously.

A Versatile Approach to Investing

Understanding the different types of stocks and their specific characteristics can greatly enhance an investor's ability to build a diversified and effective investment portfolio.  Whether seeking growth, stability, income, or investment in social responsibility, various stocks are available to meet different investment goals and risk tolerances.