Stock market investment is an intriguing area. Many people are interested to invest in the market to help generate wealth. However, merely opting for any stock without having a proper idea about them is not a good note to start off with. So we thought of compiling the different types of stocks in the market and their basis for classification so as to ease your journey into the investing. Read along.
Types of Stocks in the Stock Market
Classification Based on the Stock Classes
One of the primary factors that are used when classifying the stocks is based on the criterion of voting rights of the shareholders. Companies offer both the types of stocks with voting rights and without voting rights. The shares with voting rights are the ones where a shareholder can vote at the decisions of the company during the annual general meetings about the company’s management. Similarly, there are shares that do not offer voting rights to the shareholders. There’s also a third class of stocks where the shareholders have the privilege to vote only in matters pertaining to some aspects of the company.
Classification Based on the Market Capitalization
The next type of classification is based on the market capitalization aspect. Market capitalization refers to the total shareholding of the company and is normally calculated by multiplying the current stock price of the company with the total number of shares outstanding in the market. Here’s how stocks are classified based on the market capitalization.
- Large-Cap Stocks: Large-cap stock is stocks of the established enterprises that have large reserves of cash with them. Large-cap stocks are also known as blue-chip stocks and are known to be one of the market leaders of the segment. They have a capital range of above Rs 10,000 crore. It is more attuned towards steady performance and can endure tough economic conditions. These have been time tested and offer steady performance all throughout.
- Mid-Cap Stocks: Mid-cap stocks refer to the stocks that have a market capitalization of Rs 250 crores to Rs 4,000 crores. These companies are well-known names in the market and also come with high potential for growth. These have the ability to be one of the larger caps stocks in the long run. These stocks have a good track record and showcase steady growth over time. These stocks have returns similar in the weight to the large-cap ones. They offer twin advantage of offering good returns and potential for wealth growing.
- Small-Cap Stocks: Small-cap stocks are the ones with the smallest market value having a market capitalization of up to Rs 250 crores. These are often the new coming companies that have the potential to turn out to be one of the multi-baggers in the long run. These stocks may not have the dividend offering every time but the one thing that runs in their favour is that they tend to be best placed for quick growth and wealth generation. A peculiar thing about small-cap stocks is that they don’t tend to withstand the market transitions and can wind down if the market dynamics hit them hard.
Classification Based on the Ownership
We here take a look at the classification of shares based on the ownership aspect, the main of which are preferred & common stocks and the other one being hybrid stocks.
- Preferred & Common Stocks: The major difference between the preferred and common stocks is the yearly dividend payment offered by the company. Preferred stockholders are offered the fixed dividend amount every year while the common stockholders are left behind in this aspect. However, when it comes to surplus money after distribution of preference dividends, its common stock that gets the beneficiary part. Common stocks tend to be volatile than the preferred stocks. Furthermore, when it comes to a company liquidation, the common shareholders tend to enjoy the priority over the preferred shareholder. Common stockholder also has a voting right to them something that preference shareholders do not enjoy.
- Hybrid Stocks: There are times when the companies offer preferred shares with an option to convert them into common stocks in the near future albeit with certain obligations and conditions. These stocks generally tend to be known as the hybrid stocks or convertible preferred shares. They may or may not have the voting right facility.
Classification Based on Dividend Payment
Dividend income tends to be the primary source of income for shareholders and may companies offer shares with the dividend. The question amounts to the amount of dividend on offer. We here seek the classification of shares based on the dividend payment.
- Growth Stocks: Growth stocks are the one where the company rather than paying high dividends tend to reinvest the earnings so as to help it grow at a fast pace. The name growth stocks are derived from this very stance. In this case, the value of the shares rises with the growth in the company and helps to increase the wealth of the investor. This one is more suited for those who seek long term growth potential rather than those who want an immediate source of income. They also tend to carry a higher risk that their counterpart shares.
- Income stocks: Income stocks are those which offer a high dividend in relation to the price of the company. Higher dividend yields mean higher income and hence the name income stocks. They are also known as dividend yield stocks or dog stocks. Income stocks indicate the stability of the company which can consistently high dividends. Normally, the stock price of these companies doesn’t tend to increase that much. Income stocks are generally preferred by those investors who are looking at a secondary source of income rather than long term wealth growing.
Classification Based on the Fundamentals
This concept is generally for the followers of value investing who believe in the aspect that a share price should be equal to the instructive value of the company’s share. Here, different aspects like recent share prices, per-share earnings, profits and other financial data are taken into consideration to reach out to an instructive value. We here look at how the shares are classified based on the fundamentals.
- Overvalued Shares: Overvalued shares are those which exceed the intrinsic value of the share. Overvalued shares are those where the current price is way above the valuation and the economists and experts alike expect the price to drop down eventually in the long run. Overvaluation may arise out of the uptick in emotional trading or via any gut-driven decision making. This artificially inflates the share price making it overvalued ones. Any potential investor will look to avoid overpaying for the stocks.
- Undervalued Shares: Undervalued shares are the ones where the current share value is lower than the intrinsic value. These shares tend to trade way below their worth but hold potential for the high gains later on when the shares hit the desired levels. These stocks are also known as value stocks. These stocks are often preferred by the value investors who believe that the share price will eventually rise up and they can reap the rewards later on.
Classification Based on the Risk
Shares tend to go through different fluctuations in the market. Since the market is dynamic and ever-changing, the shares are bound to go through patches of an upward and downward trend. Here’s the classification based on the risk factor.
- Beta Stocks: Beta is the measure of risk which is derived by calculating the price volatility. This can either be positive or negative in nature denoting the market moving trend. The higher the beta, the higher is the risk quotient. Analysts measure risk and find out the volatility of the share.
- Blue Chip Stocks: Blue-chip stocks are the stocks of large-cap companies that have lower liabilities and have a sound financial situation. They have stable earnings and pay regular dividends to the shareholders. The companies with a blue-chip status have the capacity to endure economic transitions with ease. They are one of the safer avenues of investment for any potential investor.
Classification Based on the Price Trends
The stock prices of the company tend to move along the market trends and more. This particular aspect looks at how the shares are classified based on price trends.
- Defensive Stocks: We talked about how the stock prices are affected by the market trends and fluctuations around. Although it’s a normal stance that the shares are affected by the market functioning, there are some stocks that are relatively unmoved by the economic conditions around. Some of the major examples of these types of stock are food, beverages, insurance sector, drugs and more. Such stocks tend to be preferred when the economic conditions are pretty poor.
- Cyclical Stocks: Cyclical stocks are those stocks that are greatly affected by the economic conditions and market changes. Cyclical stocks tend to go through high price fluctuations and can rapidly grow during the times of boom cycle and slow down during the slow economy. A major example of these sectors is the automobile.
We hope this sheds light on the types of shares and how they are classified further. Having a clear knowledge of the type of stock allows an individual a base to kickstart their investment journey ahead. Happy Investing!