What are the Different Types of Stocks?
There are many types of stocks available in stock market. Another option for financial market investment is through stocks. Class and ownership are two basic factors that can be used to classify these stocks into different classes.
As a trader, you must be aware of the various stock categories in order to make well-informed judgments, even if this is the basic idea of stocks. There are various criteria that can be used to classify stocks, including dividend payout, market capitalization, ownership, and class.
How are Different Stocks Categorize?
There are various criterias on which stocks are categorized:
1. Types Of Stocks Based On Market Capitalization
Large Cap-Stocks: Large-cap stocks are the shares of the biggest corporations on the market, like ICICI, Reliance, and Tata. Often, they are prestigious companies. They have substantial financial reserves at their disposal to take advantage of new business opportunities because they are well-established businesses.
Large-cap stocks, on the other hand, are not able to develop as quickly due to their sheer size, and over time, smaller stocks typically outperform them. But in contrast to small- and mid-cap equities, investors benefit from comparatively larger dividends and the long-term capital preservation they provide.
Mid Cap-Stocks: Typically, medium-sized company equities are known as mid-cap stocks. Mid-cap stocks are often defined as companies with a market capitalization between Rs. 250 crore and Rs. 4,000 crore. These equities belong to well-known businesses that are regarded as established participants in the industry. They provide you with the stability of a larger company along with the added benefit of buying equities that have strong growth potential.
Among the mid-cap stocks are baby blue chips, or businesses with a strong track record and consistent growth. They lack the size of blue-chip equities, which are large-cap stocks. Over time, these stocks typically have strong growth.
Small Cap-Stocks: As the name suggests, they are the tiniest equities on the market. They frequently represent small-size businesses. Small cap stocks are generally defined as companies with a market valuation of up to Rs 250 crore.
These stocks are the ideal alternative for an investor who wants to make big long-term returns, as long as he does not need present dividends and can tolerate market volatility. This is because tiny businesses have the potential to expand rapidly in the future. As a result, an investor can profit by purchasing the shares at a low price during the company’s early stages. However, many of these businesses are rather new. As a result, it is impossible to estimate their market performance.
Since they are small businesses, growth spurts have a significant impact on their revenues and values, which drives up prices. However, these companies’ stocks have a history of volatility and could see sharp declines.
2. Types Of Stocks Based on Ownership
Common Stocks: Common stocks in India are popular among investors as they offer the opportunity to receive dividends, which represent a portion of the company’s profits. These stocks provide ownership in the company and typically come with voting rights at shareholder meetings. Common stocks are widely traded on Indian stock exchanges and are favored for their potential for capital appreciation and dividend income.
Preferred Stocks: Preferred stocks offer investors guaranteed dividends, unlike common stocks, making them an attractive choice for income-oriented investors. In the event of bankruptcy, preferred stockholders have priority over common stockholders in receiving payouts. This preferential treatment provides a level of security to investors, enhancing the appeal of preferred stocks despite typically offering lower potential for capital appreciation compared to common stocks.
Hybrid Stocks: Hybrid stocks blend features of preferred and common stocks, offering investors a diversified investment option. The convertible bond, a prevalent type of hybrid stock, provides flexibility by allowing investors to convert their bonds into either equity or debt based on their preferences. This versatility appeals to investors seeking potential capital appreciation along with the security of fixed income instruments, making hybrid stocks a popular choice in the market.
Convertible Preference Shares: First issued as preference stocks, these are convertible at a predetermined date into a predetermined number of common stocks. The voting rights attached to these stocks are up to the company to determine.
Stocks With Embedded Derivative Options: Typically, a company does not buy back its shares unless it feels it is appropriate to do so. On the other hand, some businesses issue stocks with callable or put-able embedded derivative options. A call-able option allows the business to repurchase its stock at a predetermined price or on a predetermined date. With a put-able option, the business gives the shareholder the choice to sell the stock back to the business at a predetermined price or at a predetermined time. Companies don’t usually issue these.
3. Types Of Stocks Based On Price Volatility
Beta Stocks: Beta stocks are assessed using the beta coefficient, a statistical measure employed by investment analysts to gauge stock price volatility. A higher beta value signifies greater investment risk associated with the stock. Investors often consider beta when evaluating portfolio diversification and risk management strategies. Stocks with higher beta values tend to experience more significant price fluctuations, presenting both opportunities for higher returns and increased exposure to market volatility.
Blue-Chip Stocks: Blue-chip stocks are renowned for their stability and reliability, thanks to their status as leading, well-established companies with solid financial performance. Examples such as Reliance Industries and Infosys exemplify this category, known for consistent dividend payouts and steady growth. Investors often favor blue-chip stocks for their resilience during economic downturns and their potential to provide long-term wealth accumulation and stability to investment portfolios.
4. Types Of Stocks Based On Fundamentals
Overvalued Stocks: These are stocks whose market price cannot be justified by their earnings potential. As a result, the market price of these stocks exceeds their intrinsic value.
Undervalued Stocks: The market value of these stocks is less than their true worth.
5. Types Of Stocks Based on Profit Sharing
Income Stocks: These stocks pay dividends on a regular basis. Since they have the potential to increase a shareholder’s income, they are known as income stocks.
These stocks are typically held by financially sound businesses that are able to distribute profits as dividends on an annual basis. But because the profits are shared, these businesses expand steadily and are regarded as low-risk investments.
Growth Stocks: There are no dividends on these stocks. Rather, the business uses its profits to fund further expansion. These businesses actively pursue expansion, and as a result, the value of their stocks rises quickly. This gives the investor a chance to profit from capital gains on the sale of the stocks.
Since the profits are based on the market price, which is subject to fluctuations for reasons outside the control of the company, these are regarded as riskier than income stocks.
6. Types Of Stocks Based on Economic Trends
Cyclical Socks: These stocks follow the direction of the economy. Therefore, these stocks’ prices decrease in negative economic trends and vice versa. Purchasing these stocks is typically advantageous during a prosperous economy.
Defensive Stocks: These stocks do not respond strongly to changes in the economy. These stocks include things like food, medication, insurance, etc. Investing in these is regarded as safer.
Bottom Line
Knowing the different kinds of stocks can help you select the ones that will best support your financial objectives.
Also Read: How To Invest In Stock Market |10 Tips For Beginners
