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Types of Stocks

Types of Stocks

Types of Stocks

Stocks can be classified into multiple categories on various parameters – size of the company, dividend payment, industry, risk, volatility, as well as fundamentals.

Parameters

Categories

 

Stocks on the basis of ownership rules

§  Preferred & common stocks

§  Hybrid stocks

 

Stocks on the basis of dividend payments

§  Income stocks

§  Growth stocks

 

Stocks on the basis of market capitalization

§  Large-cap stocks

§  Mid-cap stocks

§  Small-cap stocks

 

Stocks on the basis of risk

§  Blue-chip stock

§  Beta stocks

 

Stocks on the basis of price trends

§  Cyclical stocks

§  Defensive stocks

 

Now let’s jump on to one by one;
  • Stocks on the basis of ownership rules- This is the most basic parameter for classifying stocks. In this case, the issuing company decides whether it will issue common, preferred or hybrid stocks.

    • Preferred & common stocks- The key difference between common and preferred stocks is in the promised dividend payments. Preferred stocks promise investors that a fixed amount will be paid as dividends every year. A common stock does not come with this promise. For this reason, the price of a preferred stock is not as volatile as that of a common stock. Another key difference between a common stock and a preferred stock is that the latter enjoy greater priority when the company is distributing surplus money.

    • Hybrid stocks- Some companies also issue hybrid stocks. These are often preferred shares that come with an option to be converted into a fixed number of common stocks at a specified time. These kinds of stocks are called ‘convertible preferred shares’. Since these are hybrid stocks, they may or may not have voting rights like common stocks.

  • Stocks on the basis of dividend payments- Dividends are the primary source of income until the shares are sold for a profit. Stocks can be classified on the basis of how much dividend the company pays.
    • Income stocks- These are stocks that distribute a higher dividend in relation to their share price. They are also called dividend-yield or dog stocks. So, a higher dividend means larger income. This is why these stocks are also called income stocks.

Income stocks are thus preferred by investors who are looking for a secondary source of income. They are relatively low-risk stocks. Investors are not taxed for their dividend income. This is another reason that long-term, relatively low-risk investors prefer income stocks.

    • Growth stocks- Not all stocks pay high dividends. This is because; companies prefer to reinvest their earnings for company operations. This usually helps the company grow at a faster rate. As a result, such stocks are often called growth stocks. Since the company grows at a faster rate; the value of the shares also rises. This helps the investor earn a higher return when the stock is sold, although this comes at the expense of lower income through dividends.

For this reason, investors choose such stocks for their long-term growth potential, and not for a secondary source of income. However, if the company ceases to grow, it cannot be called a growth stock. This makes such stocks more risky than income stocks.

  • Stocks on the basis of market capitalization- Stocks are also classified on the basis of the market value of the total shareholding of a company. This is calculated using market capitalization, where you multiply the share price by the total number of issued shares. There are three kinds of stocks on the basis of market capitalization.

    • Large-cap stocks- Stocks of the largest companies in the market such as Tata, Reliance, and ICICI are classified as large-cap stocks. They are often blue-chip firms. Being established enterprises; they have at their disposal large reserves of cash to exploit new business opportunities. However, the sheer size of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time.

    • Mid-cap stocks- Mid-cap stocks are typically stocks of medium-sized companies. Generally, companies that have a market capitalization in the range of Rs. 250 crore and Rs. 4,000 crore are mid-cap stocks.

These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Mid-cap stocks also include baby blue chips – companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks), but lack their size. These stocks tend to grow well over the long term.

    • Small-cap stocks- ‘Cap’ is the short form of ‘Capitalization’. As the name suggests, these are stocks with the smallest values in the market. They often represent small-size companies. Generally companies that have a market capitalization in the range of up to Rs. 250 crore are small cap stocks.

Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring. On the other hand, the stocks of these companies tend to be volatile and may decline dramatically.

  • Stocks on the basis of risk- Some stocks are riskier than others. This is because their share prices fluctuate more. However, just because a stock is risky does not mean investors should avoid it. Risky stocks have the potential to make you greater profits. Low-risk stocks, in contrast, give you lower returns.

    • Blue-chip stock- These are stocks of well-established companies with stable earnings. These companies have lower liabilities like debt. This helps the companies pay regular dividends.

Blue-chip stocks are thus considered safe and stabile. They are named after blue-colored chips in the game of poker, as the chips are considered the most valuable.

    • Beta stocks- Analysts measure risk – called beta – by calculating the volatility in its price. Beta values can have positive or negative values. The sign merely denotes if the stock is likely to move in sync with the market or against the market.

What really matters is the absolute value of beta. Higher the beta greater the volatility and thus more the risk. A beta value over 1 means the stock is more volatile than the market. Thus, high beta stocks are riskier. However, a smart investor can use this to make greater profits.

  • Stocks on the basis of price trends- Prices of stocks often move in tandem with company earnings. Stocks are thus classified into two groups:

  • Cyclical stocks- Some companies are more affected by economic trends. Their growth moderates in a slow economy, or fastens in a booming economy. As a result, prices of such stocks tend to fluctuate more as economic conditions change.

They rise during economic booms, and fall as the economy slows down. Stocks of automobile companies are the best example of cyclical stocks.

  • Defensive stocksUnlike cyclical stocks, defensive stocks are issued by companies relatively unmoved by economic conditions. Best examples are stocks of companies in the food, beverages, drugs and insurance sectors.

Such stocks are typically preferred when economic conditions are poor, while cyclical stocks are preferred when the economy is booming.

Some other stocks-
  • Penny stocks- penny stocks are low-quality companies whose stock prices are extremely inexpensive, typically less than Rs 10 per share. With dangerously speculative business models, penny stocks are prone to schemes that can drain your entire investment. It’s important to know about the dangers of penny stocks.

  • IPO stocks- IPO stocks are stocks of companies that have recently gone public through an initial public offering. IPOs often generate a lot of excitement among investors looking to get in on the ground floor of a promising business concept. But they can also be volatile, especially when there’s disagreement within the investment community about their prospects for growth and profit. A stock generally retains its status as an IPO stock for at least a year and for as long as two to four years after it becomes public.

  • International stocks- there are some stocks that not belong from domestic country (India). The company’s main headquarter is outside of India. Let suppose we take examples of Meta (Facebook). This companies headquarter is in California (US). It means this is international company in India.

There is some other stocks we traded in our domestic country, and we get geographical diversification after investing in this type of company.



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