Ordinarily, when individuals contemplate investments, they envision equities openly traded and exchanged for a profit. There are many different types of stocks out there, and investors need to know about them and identify when they could be a good fit. For investors, we’ve included a breakdown of the different types of stocks available to reduce the amount of uncertainty.
Most individuals have a basic understanding of stock ownership, but there are many distinct types of stocks, each with its pros and cons. Depending on the scenario and the state of the economy, certain stocks may be better investments than others. Certain equities fit into numerous categories, and several classifications have similar characteristics.
Different Types of Stocks
1. Classification Based on Market Capitalisation
Stocks can be categorized according to the firm’s market capitalization, which is the total amount of shares held by the company’s shareholders. A company’s market capitalization is derived by multiplying the current price of its stock by the total number of shares that are currently traded on the open market. The types of stocks listed below are categorised according to their market capitalization.
I. Large-Cap Stocks
These are typically the shares of blue-chip, well-established companies with a large amount of cash. While large-cap companies have a higher market capitalization, this doesn’t always mean expanding faster. It’s more common for small businesses to outperform their larger counterparts over the long term. With large-cap companies, investors can get larger dividends than smaller and mid-cap equities, ensuring that the money is safe for the long term.
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II. Med-Cap Stocks
Stocks of medium-sized firms with a market value of between INR 250 and INR 4000 crore are listed in medium-cap stocks. A well-established brand in the market gives these organizations the advantages of expansion potential and stability that come with being a long-term player in the industry. With the notable exception of their lower size, mid-cap companies have a long and successful history of sustained growth. These equities perform and grow well over the long run.
III. Small-Cap Stocks
As the name implies, small-cap stocks have the lowest market value compared to their larger-cap counterparts. These are small- and medium-sized businesses with a market value of up to INR 250 million and the potential to develop rapidly in the foreseeable future. Investors who are ready to commit to the long term and are not overly concerned with present dividends and those who are willing to maintain their positions during market volatility stand to win significantly in the future.
You may benefit from the company’s growth by purchasing these shares while they are offered at a reasonable price in its early stages. Despite the company’s early stage, it is hard to forecast how it will fare in the market. The stock prices of these small-cap companies are extremely volatile, and their growth substantially impacts the value and income of the parent business. This is because these companies are young.
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2. Ownership Based Stocks
Investors may possess three types of stocks based on their ownership, each of which provides them with a unique set of rights and growth possibilities.
I. Preferred and Common Stocks
Common stocks, also known as ordinary shares, represent a portion of a corporation’s ownership. This stock class enables investors to share in the company’s earnings, typically distributed as dividends. Common investors elect the board of directors of a corporation and have a say in the company’s policy. During a liquidation event, holders of this stock class are entitled to receive the firm’s assets, but only until preferred stockholders, and other debt holders have indeed been compensated. Common stock is often distributed to company founders and workers. Now, let’s see another type of stock, i.e., preferred stock.
Preferred stock, also known as preference shares, on the other hand, allows the holder to receive monthly dividend payments when dividends are distributed to common shareholders. The shareholders of the preferred stocks are the first to be paid out if the firm goes out of business or enters bankruptcy. Preferred stock does not provide voting rights and is well-suited for investors wanting a steady stream of passive income.
You can benefit from the company’s success or suffer from its failure if you own common stock. The share price constantly fluctuates, sometimes by a few cents and other times by many dollars, depending on the level of investment opportunities and the health of the financial markets. Because there are no price ceilings, it is conceivable for shares to increase in value by doubling, tripling, or even quadrupling over time—though it is also possible for them to decrease in value. The issuing corporation may pay dividends, but they are not compelled to do so. Even if it does, the dividend’s size is not guaranteed. It may be reduced or withdrawn entirely—though corporations may be unwilling to do either if they fear it will convey a negative message about the company’s financial health.
For preferred stockholders, dividends are guaranteed, and preferred stock payments are paid out just before the dividend on common stock. As a result, preferred stock could be a smart choice if your primary goal is to generate revenue (in this case, dividends). If a firm’s earnings improve, ordinary stock dividends may increase as well. However, preferred dividends remain the same regardless of the company’s earnings.
Preferential stock’s value is less volatile than that of common stock. The result is that preferred stock doesn’t lose much value even when the stock market is down, and it doesn’t gain much worth either when the price of regular stock increases. Preferred stock ownership may hinder your capacity to achieve long-term capital gains.
Another point of distinction between common stock and preferred stock is what happens if the firm goes bankrupt or goes out of business. The responsibilities of a firm are prioritised, and commitments to preferred stockholders should be satisfied before obligations to common investors in such a situation. In contrast, preferred shareholders are ranked lower on the list of investors who will be compensated than bonds, who are ranked higher.
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II. Stocks that are Hybrids
Firms can offer preferred stock with the possibility of converting them into common shares, subject to specific circumstances, at a later date. These are referred to as hybrid stocks or changeable preferred shares, and they may or may not grant the owner the power to vote.
III. Stocks that have derivative options built in them
In the case of stocks that have embedded derivative options, the stock can be ‘called in’ or ‘put in,’ and they are not as widely available. In the case of “callable” stock, the corporation can purchase it back from the investor at a certain price at a predetermined period. Similarly, a ‘putable’ stock allows its holder to sell it to the firm at a predetermined price and within a specified time frame.
Now let’s move to other types of stocks.
3. Classification Based on the Amount of Dividends Paid
I. Growth Stocks
Due to the company’s preference to reinvest earnings to enable it to develop more quickly, these stocks don’t pay large dividends, thus, are labeled as “growth stock.” Increased share value is associated with increased corporate growth rates, encouraging investors to profit from larger investment returns. Those looking for long-term growth potential rather than a quick second way to make money will find it the most suitable investment. Growth equities are riskier than their value-oriented counterparts.
II. Income Stocks
In contrast to growth stocks, income stocks pay out a more significant dividend in proportion to the value of the stock at the time of dividend payment. Increased dividends translate into increased income, so Income Stocks are thus named. Income stocks suggest a solid firm that can afford to pay continuous dividends. Still, they are also symptomatic of companies that do not promise to develop rapidly. This implies that the stock price of such firms is unlikely to increase significantly. Preferred stocks are included in the category of income stocks.
Investment in IT is a fantastic choice for investors looking for a secondary source of income via relatively low-risk stocks. Dividend income from income stocks is not taxed, making them an excellent choice for low-risk investors looking for a long-term investment. If you are looking for high dividend-paying firms, you may want to consider using the dividend yield metric.
The dividend yield is a measurement of your earning potential as an investor (earnings per share) from your investment, calculated by dividing the total amount of dividends received by the number of shares owned. It is then expressed as a percentage in the following way: Example: If somehow the stock price is INR 100 and the company pays a dividend of INR 5 per share, the yield will be 5 percent on the investment.
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III. Penny Stocks
This is another popular type of stock among beginners. When we say “penny stock,” we refer to shares that trade for less than Rs 10 each. The issuing firms are frequently modest start-ups that need funding to continue their operations. The valuation of penny stocks can climb considerably if the firm experiences the growth that investors anticipate; nevertheless, many penny stocks don’t make investors any money because the vast range of companies isn’t successful. As a result, even though penny stocks have a modest beginning cost, they are considered high-risk investments.
IV. Stocks that are very speculative
It’s common for start-ups, businesses exploring new markets (typically abroad), or businesses that have experienced major management changes or financial restructuring to issue speculative stocks. They are high-risk investments since the firms are typically unproven, and many do not flourish. Still, the payout may be large if the company achieves it or if sufficient people put money into the company and drive its stock price upward. Sadly, the latter can result in “bubbles” that lead the value of such stocks and the corporations that issue them to skyrocket in value. Many speculative stocks were at the heart of the “Dot-com” bubble, fall, and subsequent recession that occurred in the late 1990s and early 2000s.
V. Cyclic Stocks
Cyclical equities appreciate in value whenever the economy is doing well and drop in value when the economy is doing poorly. These stocks frequently represent enterprises that provide luxury and disposable goods and services, such as airlines, automobile manufacturers, and businesses that produce and sell technology products and components. In difficult economic times, cyclical equities can lose a significant amount of value. Yet, some of these stocks can regain and even surpass their previous values after the economy has recovered.
VI. Stocks with a Defensive Stance
Due to the fact that the industries and firms that produce defensive stocks are unaffected by, or perhaps even profit from, financial slumps, they are good investments during times of economic crisis. Food, gasoline, utility, and healthcare companies are considered defensive since the demand for these products does not decline as a result of the recession. Stocks issued by corporations that provide low-cost items, such as certain well-known “big box” retailers, are considered defensive since the demand for their products grows when the economy becomes more difficult to navigate through.
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4. Classification Depending on the Level of Risk
Stocks have different levels of risk based on their share price movements. The bigger the risk, the greater the benefit for the investor, while the lower the risk, the lower the gain. The types of stocks listed below are categorised according to Level of Risk.
I. The iBeta Shares
The stock’s price volatility is used to calculate the stock’s beta or measure of risk. Beta can be either positive or negative, indicating whether or not the stock moves in lockstep with the market. The greater the beta, the greater the stock’s risk. The higher the beta number, the more volatile the stock is compared to the overall market. Many investors familiar with this metric utilise it to make investing decisions.
II. Blue-Chip Stocks
A blue-chip stock is a stock of a company that has a low level of obligations, reliable earnings, and a regular dividend. Investors looking for more secure investment options might consider investing in one of these well-established, well-known corporations. This is among the most popular types of stocks in the stock market.
You’re not alone if you’ve ever heard about the need to diversify your assets. A well-balanced portfolio benefits from exposure to a wide range of firms with a wide range of market capitalizations, geographic locations, and investment strategies. So if you want to learn more about diversifying your stock portfolio and other types of stocks, you can join The Thought Tree. We provide the best stock market course in Jaipur.