Which shares suit you?
Choosing between 20 different sauces in the steakhouse is hard enough. There are more than 40,000 shares to choose from on the stock exchange.
That’s why beginners often buy shares with names that sound familiar (Amazon, Facebook, Apple). Or because nerds recommend them on Reddit (Roblox! Bakkafrost! Crispr Therapeutics!). Or because they use the products and services themselves (Spotify, Netflix, Nike).
This is an "interesting" approach. But a more serious approach is to ask yourself first: which type of shares actually suit me?
The hare and the tortoise
Risk and return are closely related to investing. By taking big risks you can earn big returns. Very little risk will likely earn very small returns.
It sounds like a dream scenario to have bought Tesla shares for $48 in the autumn of 2019 and sell them at $883 in January 2021. But this investor could have just as easily lost all their money.
Luckily, you don't need to have nerves of steel to invest. However, you must not expect your investments to increase tenfold in just a few months. Investing in shares is more evolution than revolution. More tortoise than hare.
You can classify shares in various ways. Once you know the four general types and their characteristics, you are equipped to start building a portfolio. Once you can distinguish them, you can choose companies in a more focused way, so you can get both a return and a good night’s sleep.
It is advisable to invest in all four types to spread the risks, which means you allocate the most weight to the type that suits you best.
- Cyclical stocks
- Defensive stocks
- Growth stocks
- Value stocks
These are shares of companies that provide goods and services that are sensitive to the economic situation. If the economy is doing well and consumer confidence is good, these companies perform well.
These shares are more nice to have than must have. In any case, you must accept that they will tend to rise and fall with the peaks and troughs of the economy.
Examples of cyclical stocks include car manufacturers, banks, producers of construction materials, carriers, airlines, hotels, fashion companies and luxury goods.
If you prefer greater certainty and stability, you should look for companies that are less dependent on economic mood swings. Defensive stocks are shares that generally rise or fall less sharply than cyclical stocks. Whether there’s a crisis or not, we will still be buying medicines, vegetables, shower gels and fire insurance.
Things get more risky when you invest in growth stocks. These are companies that have, or are expected to have, faster growth in earnings and turnover than the market average. A growth company typically does something that a competitor cannot (yet) do. It is a disruptor or a market leader in its field. It could also be a new company that holds a patent or has developed a new technology.
Growth companies often ride on a hype. They get a lot of media attention. With these shares you the chance of a high potential return, usually as a result of steep share price rises. Or maybe as a result of big companies putting a lot of money on the table to buy the shares from you. On the other hand, you can also lose a bunch of money fast if the company does not meet the high expectations.
Growth shares can be found in all sectors, from health care (such as biotech and gene therapy) to banking (fintechs).
Value stocks are all about doing good business. In short, buying shares at a discount. In a nutshell, value shares cost less than what they are actually worth. Their price may be low because their business model needs updating, or because growth is low. It may also be that the company doesn't have a sexy image or simply fails to communicate very much.
These are often mature companies. You will find them in all sectors, and they are particularly suitable for investors who invest over the long term and want to avoid excessive risks.
If you invest in shares, you can build up your portfolio by including these four types: for example 20% cyclical shares, 40% defensive shares, 20% growth shares and 20% value shares.
You can do this by investing in individual shares. Don't have enough time or don't feel like getting into the details? Trackers and investment funds are alternatives. This way you can invest in dozens or even hundreds of shares through a single product. There are trackers and investment funds designed for each type of share.
This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.