Depending on their liquidity, traded volume, spreads, and volatility, there are three types of stocks: blue chips, mid-caps and small-caps stocks.
- Stocks of the first group (Apple, Amazon, Facebook, Netflix, etc.) are the most attractive from the investment point of view due to its characteristic features: high liquidity, low volatility, and tight spreads, as well as quite a big daily traded volume.
- The second type, mid-caps, are less popular because they have lower liquidity and smaller traded volumes, while spreads are wider.
- When it comes to the third group, small-caps stocks, they are marked by the lowest liquidity but the largest spreads and extremely high volatility at the same time.
Investors that prefer stocks can be divided into several categories:
- Passive. They prefer to invest in “blue chips” (less often – second or third); most of all, they pursue reliability and stability.
- Active. Their key goal is increasing profits along with minimizing risks, that’s why they mostly invest in “blue chips”, but do not ignore mid-caps and sometimes even small-caps stocks as well.
- Speculators. These ones are into short-term investments in order to gain profits very quickly, hence they choose the most liquid stocks of the first type.
The choice of stocks to invest in can be influenced by an investor’s market strategy and attitude towards risks. In addition to that, it is not recommended to invest all funds in the same financial instrument. It would be much better to diversify your investment portfolio. The first type of stocks would be an excellent choice for most investors (both beginners and experienced ones. In order to invest in other types of stocks, one must have a lot of specific knowledge and vast investment experience, that’s why they require investors to be very careful.