All the stocks trading in the market can be divided in some classes. The division is done depending on the trading behavior, growth opportunity and the current valuation of the stocks.
Growth Stocks: Growth stocks are the stocks which have the ability to earn higher returns than other stocks. Normally the stocks with price growth potential are classified as growth stocks.
Suppose one company’s share price is now USD 100 which reflects the valuation of the company properly. Let’s consider the growth potential of the company is very high and it is expected to grow at an average rate of 20% in next 5 years. The investors will expect the share price to grow at that rate or better than that rate for next 5 years to reflect the growth in revenue and valuation. These stocks are called growth stocks which always attracts high investor interest and very high investment.
Value Stocks: Stocks that are priced low compared to their earnings or undervalued compared to its peers. The “value” refers to the value buying of these stocks.
Suppose two companies X and Y belong to the same industry and earnings are nearly same for both of them and also the other factors remain same. Here if the share price of company X is valued much less than the company Y, then the share price of X is considered to be much undervalued and has huge upside potential. These are the value stocks which stays undiscovered until the investors start buying the same because of the cheap price.
Speculative stocks: These stocks involve speculative trading because of some news or events which can decrease or increase the valuation significantly. Trading is done based on speculation of any rumors or news which does not have any base. For negative news trader take huge short positions.
Incident of speculative trading
All these news if comes true can have huge impact on the share price of the corresponding company. Traders take the position to take advantage of the movement based on these speculations to earn money before the other investors.
Defensive stocks: These stocks are very less sensitive to different news or actions in the market mainly because of the defensive nature of the business like FMCG, Pharmacy etc. FMCG and Pharmacy sectors have strong demand even during the economic slowdown or recession, at the same time, these sectors as a whole never witnessed a very high increase in sales.
These stocks are very much less sensitive to the market interest rate changes and economic activity. With low beta value, these stocks neither provide very high return or very low return. But these stocks have the potential to outperform the market index during the economic slowdown or recession.
Cyclical stocks: The stocks which provide different rate of return with the cyclical change in the economic cycle because of highly related change in demand. These stocks are very much interest rate sensitive and are getting impacted heavily due to the economic cycle changes. These stocks normally have higher than one beta which denotes more volatility.
For example stocks of auto sector, real estate sector and banking sector companies are getting affected directly by the economic cycle changes because of related demands. At the time slowdown, these sectors witness lower demand and at the time of high growth, these sectors witness very high demand.