Finschool By 5paisa

Types and Classification of Stocks

Types and classification of stocks

Types and Classification of Stocks

Financial success for many has been through the Stock markets. As we start exploring stocks and the stock markets, we would see that they are frequently mentioned in terms of several stock categories and classifications. Let us first see the types and classification of stocks-

(1) Market Capitalization Based

The market capitalization of a corporation, which is the total shareholding of a company, can be used to classify stocks. This is computed by multiplying the current stock price by the total number of outstanding shares in the market. The sorts of equities based on market capitalization are listed below.

Large Cap:

  • These are frequently stocks of blue-chip corporations, which are well-established businesses with substantial cash reserves.
  • It’s worth noting that just because large cap companies are bigger doesn’t mean they’re growing faster. In reality, over a longer period of time, tiny stock businesses tend to outperform them.
  • Large cap stocks, on the other hand, have the advantage of paying bigger dividends to
    investors than smaller and mid-cap equities, ensuring that money is conserved over time.

Mid-Cap Stocks:

  • Mid-cap companies are companies whose market cap is above Rs 5,000 crore but less than Rs 20,000 crore 
  • These companies provide the benefit of potential for growth as well as the stability that comes with being a seasoned participant in the stock market. 
  • Mid-cap companies have a long history of consistent growth and are quite comparable to blue-chip stocks, with the exception of their size. These stocks perform and grow well over time. 

Small Cap Stocks: 

  • Small-cap companies are those with a market capitalization of less than Rs 5,000 crores in India. 
  • Small-cap stocks are the stocks issued by these small businesses.
  • Despite their modest size, these businesses can offer large returns for investors. 
  • Their minimal possibilities of long-term success make them extremely risky, making the stocks of such small businesses extremely volatile. 
(2) Based On Ownership

Preferred Stock

  • A preferred stock is a share of a company just like a regular (or common) stock, but preferred stocks include some added protections for shareholders. For example, preferred stockholders get priority over common stockholders when it comes to dividend payments.
  • Preferred stockholders also rank higher in the company’s capital structure (which means they’ll be paid out before common shareholders during a liquidation of assets). Thus, preferred stocks are generally considered less risky than common stocks, but more risky than bonds. 

Common Stocks

  • Common stock represents shares of ownership in a corporation and the type of stock in which most people invest. When people talk about stocks, they are usually referring to common stock. 
  • Common shares represent a claim on profits (dividends) and confer voting rights. Investors most often get one vote per share owned to elect board members who oversee the major decisions made by management. Stockholders thus have the ability to exercise control over corporate policy and management issues compared to preferred shareholders. 

Hybrid Stocks

  • Some corporations issue preferred shares with the possibility of converting them to common shares at a later date, subject to specific criteria. 
  • Hybrid stocks, sometimes known as convertible preferred shares, may or may not have voting rights.

 Stocks With Embedded Derivative Options

  • Stocks that include an embedded derivative option can be ‘callable’ or ‘putable,’ and they are not as widely available. 
  • A ‘callable’ stock is one that can be bought back by the corporation at a specific price at a specific time. 
  • A ‘putable’ stock, on the other hand, allows its owner to sell it to the corporation at a set price and time. 
(3) Based On Price Trends

The fluctuation of stock prices in tandem with or against business profits determines this classification. 

Defensive Stocks

  • These are stocks that are relatively unaffected by economic situations and are preferred in low market conditions. 
  • Companies in the food and beverage industry are a good example. 

Cyclical Stocks 

  • Cyclical stocks are those that are heavily influenced by economic conditions and experience significant price variations as a result of market volatility. 
  • During a boom, these stocks increase quickly, but as the economy slows, their growth slows as well. Automobile stocks are included in this group. 
(4) Based On Risk

Beta Stocks 

  • The beta, or risk measure, is calculated by calculating the stock’s price volatility. Beta can be positive or negative, indicating whether it goes in lockstep with or against the market.  
  • The stock’s risk quotient is higher if the beta is higher. Many investors who are aware of this metric utilise it to make investing decisions. 

Blue Chip 

  • Blue chip stocks are those that belong to corporations with limited liabilities, reliable earnings, and regular dividends. 
  • These huge, well-known corporations with a long track record of strong financial performance are a good bet for investors looking for safer investments. 
(5) Based On Fundamentals

Overvalued Shares 

  • These are shares that are overvalued because their prices are higher than their intrinsic value.

Undervalued Shares 

  • These are generally favoured by value investors because they anticipate the price of the stock will rise in the future. 
(6) Based On Dividend Payment

Growth Stocks: 

  • Because the company chooses to reinvest earnings to enable it to develop faster, these stocks do not pay big dividends, hence the name growth stocks. 
  • The value of the company’s shares rises in tandem with its rapid growth rate, allowing investors to profit from bigger returns. 
  • It is best suited for investors looking for long-term growth potential rather than a quick source of income. 

Income Stocks: 

  • Income companies pay out a bigger dividend in relation to the price of the company than growth stocks. 
  • The term Income Stocks comes from the fact that more dividends equal higher income. 
  • Income stocks are a good indicator of a steady company that can pay continuous dividends, but they also don’t guarantee a lot of growth.  
  • As a result, the stock price of such companies may not rise significantly. 
  • Preferred stocks are included in income stocks. 
Conclusion

One should know the difference between all these stocks before investing in any. Understanding the differences between these stocks and researching about them in depth will be better for them and this will help the investor to make a wise decision.



Related Articles