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Chapter 3 Types of Stocks

Stock

A stock (or a share) is an ownership interest in the underlying business. If you are the owner of the stock, you own a proportionate stake of the company whose stock you own. For E.g. if you own 1000 shares in HDFC Bank, you own 0.00003955% (No. of shares you own / No. of shares of HDFC bank in issue) of the bank.

Types of Stocks

Growth

Companies that consistently manage to grow their profits faster than their industry peers are called growth stocks. Their faster growth is generally the result of some sustainable competitive advantages. Since they need to constantly fund their growth, they typically pay out little or no dividends. The investors are rewarded from appreciation in stock price. Since competitors can emulate them and eliminate their competitive advantage, growth stocks are more risky than some of the categories we discuss next.

Value

Stocks available at a significant discount to their intrinsic value fall under this category. These are sound businesses in sectors that are not favored by the market presently. Some of them pay a significant share of their profits as dividend or resort to share buybacks when their shares are out of favor.

Dividend Yield

These are companies that generate significant amount of cash in the business and do not have enough profitable opportunities to deploy the cash. So, they return most of it to the shareholders in the form of dividends.

Cyclical

These are companies whose profits are linked to economic cycles. They report significant profits when economic growth is strong and struggle to report profits when economic growth slows down. Typical examples are commodity companies in metals, cement, oil & gas etc.

Information sources on stocks

An investor can gather information on the stock from various sources. Some of them are mentioned below:

Red Herring Prospectus (RHP)

This is the most important information source on any company and the best place to start. It contains industry overview, company background, risk factors, management background, management discussion and analysis (MD&A) that gives outlook of the business going forward and detailed financial statements. RHP’s are available on the SEBI website.

Annual Reports

Publicly listed companies publish detailed reports annually that include industry overview, company background, company strategy, business outlook and detailed financial statements of the current and preceding financial year. Annual reports are available on the respective company websites.

Quarterly results

Publicly listed companies publish quarterly reports of financial performance with the stock exchanges. They also contain business segment-wise information, data on promoter pledging of shares and non-recurring items that impacted financial performance in the quarter.

Investor Presentations

Many publicly listed companies provide detailed investor presentations that cover company background, company strategy, business outlook and detailed financial statements of the current and preceding financial period.

Earnings conference calls

Many companies conduct conference calls after quarterly results wherein management provides guidance of performance over the medium term and take questions from investors and analysts.

Management interviews in print/TV

Management interviews provide clues on management focus on performance, transparency and shareholder friendliness.

Key takeaways

  • stock is an ownership in a business or a company.

  • There are different types of stocks such as growth, dividend yield, value and cyclical stocks.

  • information on stocks can be collected from annual reports, earnings call, management interviews and investor presentations.

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