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Module 4 Part 1/2: Types of shares

July 17, 2023
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EasyEquities
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EasyEquities

Discussing the different types of shares.

Welcome to the EasyEquities Mentorship Program, where we make investing EASY for you. 

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get into it!

The different types of shares that we will discuss are (The first three will be discussed in this article):
Dividend stocks
Small-cap and medium-cap stocks
Growth stocks
Value stocks
Cyclical stocks
Defensive stocks

Dividend stocks

As discussed in previous topics, dividends are paid to shareholders from cash reserves. In other words, shareholders get paid for literally just owning shares.

Most dividend companies are very large with little room to grow. Instead of reinvesting all their profits back into the business, profits get paid back to shareholders. For this reason, most dividend stocks are considered less risky.

Great dividend stocks usually have increasing dividend yields every year. Some companies have been increasing their dividends every year for over 50 years!

Examples include:
Coca-Cola
Microsoft
Johnson and Johnson

Small-cap and medium-cap stocks

Small caps are stocks that are listed on the JSE with a market cap (size) of less than R1 billion. They are often small businesses that need to raise capital. These companies can grow dramatically if the company succeeds, however, many small caps fail and do not make investors money. Small caps are therefore considered high risk, high reward.

Medium cap stocks are listed on the JSE with a market cap of between R1 billion and R10 billion. These businesses are more proven than small-cap stocks. Most medium caps are in the middle of their growth curve. They are expected to grow profits, market share, and productivity.

Figure 1 [refer to the image attached] illustrates different types of stocks based on market cap.

Growth Stocks

These are issued by companies that constantly reinvest profits back into the business to fund development. The simplest way to define growth stocks is that they grow revenue by +- 25% every year without paying significant dividends.

They do not pay high dividends instead, as the company grows, investors receive higher capital gains on the increased value of the stock.
Growth stocks tend to grow faster than the market, thus making them very difficult to value.

These stocks can lose value when growth slows as a natural effect of a business's life cycle, or if the company experiences a financial downturn. Some growth stocks are riskier than others.

Here are some examples of growth stocks as of June 2022:
Purple Group (40.5% revenue growth)
Omnia Holdings Limited (30.6% revenue growth)
Advanced Micro Devices (70.9% revenue growth)
Tesla (80.5% revenue growth)

 


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