What types of shares are there?

Netflix, Amazon, Facebook, Tesla: who wouldn’t want shares in these cool companies? Buying stocks is a well-known and popular way to invest. You often hear success stories from people about investing in stocks. Perhaps this has piqued your interest and you also want to invest in stocks, but how do you choose stocks? What types of stocks are there, and how do you choose? Read, learn and invest!

Note! Investing is risky; you can lose (part of) your deposit. Whether you invest in stocks, obliagties or ETFs: invest only with money you can spare. So: savings, mortgage and food priority No. 1, and only then think about investing. Promise?

What are shares again?

Shares are very small pieces of a company. So investing in stocks means you are part-owner of the company. If a company makes a profit, you often benefit from it in the form of dividends. And if the underlying stock price rises, you benefit from the price increase. The dividend is always positive, after all this is company profit, but a share price increase can also be a share price decrease, for example if the company or the economy is doing badly. If you bought a stock for 100 euros, and it is now worth 90 euros per share, you make a loss of 10 euros per share related to the drop in price.

Read more about investing in stocks here

Growth shares

A growth stock is characterized by the expected growth of the company. These types of shares are often issued by the company to raise money from investors and investors so that the company can take advantage of this growth potential. Growth stocks also generally do not pay dividends because these dividends (if they make a profit at all!) will be reinvested in the company for even more future growth. Growth stocks are often purchased in order to potentially sell these stocks at a later stage for a profit. Good examples are tech companies such as Google and Facebook. 

So investors buy growth stocks because they hope to make a lot of profits from them in the future.

Characteristics of growth shares are:

• Low or no dividend yield. These types of companies pay virtually no dividends. In fact, there often is not, and if there is any profit at all, they invest it in growth.
• Focus on revenue growth. Despite no profit, they often have strong sales growth.
• The course price is high. This is because investors have high expectations of the future gains that growth stocks can make. Investors are then willing to pay a high price.

Cyclical stocks

Cyclical stocks are those that are highly dependent on the state of the economy. When there is economic growth, cyclical stocks show a price gain . If the economy slows down, the price of a cyclical stock can drop significantly. Especially with a recession the likelihood of a share price drop is high. Some examples of cyclical stocks are ArcelorMittal, Randstad and Aperam. So, in short , a cyclical stock is a stock that moves with the economic situation. Is the economy doing well? Then the share rises. Is the economy going badly? Then the stock goes down with it.

Characteristics of cyclical stocks are

• The stock price moves strongly with the economy. Is the economy in a slump or just a peak? Then you see that reflected in the stock prices.

Examples of sectors that are cyclical

Industries that rely heavily on the economy, think tourism, the airline industry, construction and luxury goods.

Defensive stocks

Defensive stocks are those that are comparatively less sensitive to developments in the economy. They are stocks with low volatility, that is, with a price that does not make as many violent price movements. If a defensive stock responds to a development, it is often a violent development. Consider an accounting scandal or a corruption scandal.

Defensive stocks almost always show the same price results . If you hold defensive stocks, then you don’t have to worry that your stocks will suddenly be worth much less overnight. Large price increases with large gains are also unfortunately not common with these stocks.

Defensive stocks often belong to companies that do not have as much to do with financial products. These include companies in the food industry, the pharmaceutical industry and the gas, water and electrical industry. Some examples of defensive stocks include Ahold, Heineken, Unilever and Wolters Kluwer.

Characteristics of defensive stocks

• Steady course. These stocks are not very volatile (moving in price).
• Companies operating in sectors that are always in demand.

Examples of sectors with defensive stocks

Think utility companies, or health care, food and pharmaceuticals.

Dividend shares

That you can make price gains with shares   is well known. You can also profit from shares by receiving dividends . In fact, some companies distribute part of their profits to shareholders. This profit sharing is also called dividends.

A major advantage of dividends is that they can be passive income. You can then reinvest this money in new stocks, allowing your portfolio to grow exponentially. Or you can pay yourself the dividend and use it as income.

When looking for high dividend stocks, it is wise not to look only at the companies that pay the highest dividends. For example, if a stock pays 7 percent in dividends but falls 8 percent in value each year you end up with a negative balance   .

When a company pays dividends can vary. Dutch companies often do this once or twice a year. For American companies, however, it is quite common to do this quarterly or even monthly. So when you buy up shares smartly, you can build a steady income from these shares.

Dividend stocks are also called value stocks. Examples of dividend stocks include Coca Cola, Philips, ING and Zurich Insurance Group.

Read all about dividend investing here

What stocks should you buy?

Which stocks you should buy, we can’t tell you. Investing is stocks requires a lot of time and attention, after all, there are nearly 40,000 companies in the world that you can invest in on the stock market. If you want to buy stocks, it may be smart to apply analysis. Don’t feel like doing this and think investing in individual stocks is too risky? Then investing in an ETF may be more suitable for you. Read more about ETF investing here.

How can you buy shares?

You can buy stocks yourself through an online broker, such as BUX Zero or DEGIRO, These are both online brokers with low fees and access to many stocks worldwide. Read more about different banks and brokers here and find out which platform suits you.

Want to know more?

Want to learn more about investing in stocks, or investing in other products such as ETFs, crypto, retirement investing and sustainable investing? As an Elfin member, you get access to the Starting to Invest e-course. Sign up here!