Personal Finance

Types of Stocks

January 18, 2021

Types of Stocks

You would often think about suitable companies to invest in, to make your choice easier stocks are divided into categories.

Stocks are classified into multiple categories on parameters such as the size of the company, dividend payment, industry, risk, volatility, fundamentals, and so on.

Here is an explanation of the types of stock along with the categories they fall into:

Based on Ownership

In terms of ownership, stocks are classified into two categories: Preferred Stocks and Common Stocks.

Preferred Stocks

Preferred stocks guarantee stakeholders a fixed dividend. Owing to this these stocks aren’t much volatile. However, preferred stocks do not give voting rights to stakeholders.

But the advantage of owning preferred stock is, in an event of liquidation, preferred shareholders are paid off before common shareholders.

The company has the option to buy back preferred shares from shareholders anytime with a premium.

Investors looking for a fixed income should invest in preferred stocks.

Common Stocks

When we refer to stocks in general, those are common stocks. The majority of stocks are issued in this form.

Investors have voting rights and can be a part of major decisions made by the company. Price volatility is relatively high, but investors can enjoy long-term capital growth.

However, companies may or may not pay dividends to common stockholders. Also, in the event of liquidation investors holding common stocks are the last ones in line to be paid.

Stocks Based on Market Cap

If we take into consideration market capitalization (total market value in terms of rupees of a company’s outstanding shares of stock) then the stocks are divided into three categories: large-cap, mid-cap, and small-cap.

Large Cap

Companies with market capitalization higher than Rs. 20,000 crore fall in the large-cap bracket. (Calculation of market capitalization – Total number of shares * Current market price of a share)

Large-cap companies are market leaders in their respective sectors and are not vulnerable to frequent volatility.

Cash reserves are relatively high, but growth is slower as they have established themselves in the sector.

Investors with a low-risk appetite should ideally invest in large-cap stocks.

Mid Cap

Companies with a market capitalization of Rs. 7000 crore to Rs. 26000 crore are termed as mid-cap stocks.

Mid-cap companies are well-known market players but are not market leaders of their respective sectors. Stock price volatility is moderate in mid-cap space, whereas cash reserves are moderate.

Investors with moderate risk appetite should invest in mid-cap companies.

Small-Cap

Small-cap companies are the ones having market capitalization less than Rs. 7000 crore. These are new players in the sector who are looking to establish themselves.

These are very volatile stocks and are sensitive to any kind of news or buzz around them. Their cash reserves are low because most of them are deployed towards growing the business.

However, their potential to grow is higher than mid-cap and large-cap stocks.

Investors with a high-risk profile looking for higher returns in a shorter period of time should invest in small-cap companies.

Stocks based on Dividend payments

If you are looking at dividend-yielding stocks, there are two categories within this space – income stocks and growth stocks.

Income stocks

If you are looking for a regular income by investing in stock markets through a channel of dividends then you should invest in income stocks.

These companies regularly pay huge dividends to shareholders even though their growth rate is low.

There is minimal risk involved in investing in these companies.

Growth stocks

Growth stocks are the ones that yield lower dividends and the frequency of paying dividends is also irregular as these companies invest their profits in growing the company instead of paying it off to shareholders as dividends.

Even though they have higher growth prospects, the risk involved in investing in these stocks is relatively higher than income stocks.

Investors who are looking to grow their wealth over a long period of time should invest in growth stocks.

Stocks based on price trends

In terms of pricing, stocks are divided into two categories; cyclical and defensive stocks. Let’s look at these categories in depth.

Cyclical Stocks

Cyclical stocks are highly price-sensitive to economic trends and broader economic news or data such as GDP or inflation.

These stocks would rise and fall in line with the benchmark market indices (Nifty 50 or Sensex). An ideal time to buy these stocks is in rising economic conditions. An example of cyclical stocks is automobile stocks.

Defensive Stocks

Defensive stocks are the ones that defend the otherwise falling market trend, these stocks will usually rise at a time when broader markets are in the red zone and vice versa.

The impact of broader economic trends is relatively lower on defensive stocks as compared to cyclical stocks.

A good time to buy defensive stocks is at a time when macroeconomic conditions are not ideal. Examples of defensive stocks are FMCG/ consumer staple stocks.

Conclusion

Once you know about the types of stocks that exist in share markets it’s easier to bifurcate them and understand which suits you the best. If you have most types of stocks in your portfolio, it can turn out to be a win-win situation for you.