Type of stocks
Once you start researching and studying stocks, you will come across different types of stocks. While the most prevalent types are common and preferred stocks, stocks are also categorized by company size, industry, dividend payment, risk, volatility, and fundamentals. Following are the different classifications:
1. On the basis of ownership
This is the most basic factor for the classification of stocks and it is made by the company itself while issuing the stocks. As per this criterion, there are four types of stocks that offer different rights and growth potential.
A. Preferred Stocks
Preferred stocks promise investors a fixed amount in the form of dividends at the end of every year. Thus, the price of preferred stock is not very volatile.
Preferred stocks may not have voting rights. But, they enjoy a greater priority when the company is distributing surplus money.
B. Common Stocks
Common stocks do not come with the promise of dividends. Their prices are highly volatile.
Common stockholders have voting rights, a privilege that preferred shareholders do not enjoy.
C. Hybrid Stocks
Some companies issue hybrid stocks. These are preferred shares that have the option of conversion into a fixed number of common shares at a specified time. They are also called ‘convertible preferred shares’. They may or may not have voting rights.
D. Stocks with embedded derivative options
These stocks could be ‘callable’ or ‘putable’. A ‘callable’ stock has the option to be bought back by the company at a certain price or time. A ‘putable’ share gives the shareholder the option to sell it to the company at a prescribed time or price. These types of stocks are not commonly available.
2. On the basis of market capitalization
Stocks are also classified on the basis of the market value of the total shareholding of a company. It is calculated by multiplying the current share price by the total number of shares outstanding in the market. Market capitalization divides stocks into three kinds.
A. Large-cap stocks
‘Cap’ is a short form of ‘Capitalization’. These are stocks of the largest companies in the market. As these companies are established enterprises, they have large reserves of cash to exploit new business opportunities. However, the larger size of large-cap companies does not give them an edge in growth. In actuality, smaller capitalized companies and smaller stocks tend to outperform them over time. Large-cap stocks ensure the long-term preservation of capital as they come with the benefit of allowing the investors to reap relatively higher dividends compared to small and mid-cap stocks.
B. Mid-cap stocks
These are stocks of medium-sized companies whose capitalization ranges between INR 250 crore to about INR 4000 crore. Mid-cap stocks combine the benefits of large and small-cap stocks. They have a well-recognized name in the market which brings the benefit of potential for growth along with the stability that comes with being a seasoned player in the market.
Mid-cap stocks show steady growth backed by a good track record. They are similar to blue-chip stocks with the exception of their size. These stocks grow well over time.
C. Small-cap stocks
As the name suggests, small-cap stocks are stocks with the smallest values in the market. These represent small size companies with a market capitalization of up to INR 250 crore. Small-cap stocks are the best option for an investor in the long run, provided that he does not require current dividends and can withstand price volatility.
These stocks are available at a cheap price during the initial stage of the company. However, their novelty makes it difficult to predict their performance in the market.
3. On the basis of dividend payment
Dividends are the primary source of income until the shares are sold for a profit.
A. Growth stocks
These stocks pay low dividends as the company reinvests its earnings in order to grow faster. It is from here that these stocks gain their name.
Since the growth rate of the company rises, so does the value of its shares. Thus enabling the investor to turn a profit by selling the stock at a higher price. These stocks are for long-term growth potential and not a secondary source of income. However, if the growth of the company halts, it cannot be called growth stocks. Thereby, growth stocks carry higher risk.
B. Income stocks
Income stocks provide a higher dividend in relation to their share price. A higher dividend equals more income. Hence, the name income stocks.
These stocks represent a stable company that hands out consistent dividends. On the other hand, these companies are often not high-growth companies. It means that their stock price may not rise much. These stocks are preferred by investors looking for a secondary source of income. They are low-risk stocks. Another reason that long-term, low-risk investors prefer income stocks is that their dividend income is not taxed.
4. On the basis of fundamentals
There are some investors who believe that share price must equal the intrinsic value of the company’s share. They, thus, compare share prices with share earnings, profits, etc. to reach an intrinsic value per share.
A. Overvalued Shares
These are shares with prices that exceed the intrinsic value and are considered overvalued.
B. Undervalued Shares
These types of shares are popular amongst the value investors as they believe that the price of the share would rise in the future.
5. On the basis of risk
The prices of some stocks fluctuate more than others. This makes those stocks high-risk. High-risk stocks yield higher returns, while low-risk stocks yield low returns.
A. Blue-chip stocks
These are stocks of well-recognized and established companies that have lower liabilities, stable income, and pay regular dividends.
Thus, blue-chip stocks are considered safe and low-risk. They are best suited for investors in search of safe avenues of investment. They are named after the blue-colored chips in the game of poker, as they possess the most value.
B. Beta stocks
The measure of risk or beta is derived by calculating the price volatility of the stock. Beta can be positive or negative. The signs denote whether it moves in sync with the market or against it. The higher the beta, the greater the volatility and hence, more risk. If the beta value is more than 1 it means that the stock is more volatile than the market.
6. On the basis of price trends
Prices of stocks move in tandem with or against the company earnings. Thus, stocks are classified into two -
A. Cyclical stocks
Economic trends affect some companies more than others. These types of stocks grow rapidly in the booming economy and their growth moderates during a slow economy. As a result, these stocks see great fluctuations with market changes. Automobile stocks are a great example of cyclical stocks.
B. Defensive stocks
Defensive stocks are relatively unmoved by economic conditions. They are preferred when the market conditions are poor. A common example of defensive stocks is food and beverage companies.
Originally published on https://blog.prospareto.com