Generally, a lot of people connect stocks to publicly listed shares that are traded on stock exchanges. However, it’s crucial for investors to be aware of the various stock categories available, comprehend their distinctive qualities, and be able to recognize the circumstances in which they can be viable investments. In order to clear up any confusion regarding the share market investing classes available to investors, we have listed the different stock classifications below.
Types of Stocks
Based on a multitude of variables, including fundamentals, industry, risk, dividend distribution, and company size, stocks can be categorised into a wide range of subgroups. But here, we will discuss the type of stocks on the basis of different parameters like:
- Using stock classes to classify shares
The shareholders’ voting rights are one of the main criteria used to categorize stocks. When decisions on the company’s matters are made during annual meetings, some stocks do not allow shareholders to vote. In contrast to these equities, certain other stocks permit investors to engage in corporate decision-making by exercising their right to vote. Another type of stock allows investors to vote more than once on issues involving several divisions of the business.
2. Listed stocks according to market capitalization:
The market value of a company’s complete shareholding is used to categorize stocks as well. Using market capitalization, you multiply the stock value by the overall number of shares issued to arrive at this calculation. Depending on the market capitalization, there are three different categories of stocks:
Large Cap Securities
These are generally the shares of reputable, long-established businesses with large cash reserves. It’s interesting to note that just because a company has a greater market capitalization doesn’t necessarily guarantee it will grow more quickly.
These are the equities on the market that generally consist of small businesses. Small-cap stocks are often equities of businesses with a market capitalization of up to Rs. 5,000 crores.
Mid Cap Stocks
These are the stocks of medium-sized corporations with market capitalizations ranging from 5,000 to around 20,000 crore Indian Rupees. Mid-cap firms are quite comparable to blue chip stocks, with the exception of their size, and have a strong history of consistent growth.
3. Using ownership to classify things
Investors have a variety of rights and development potential thanks to the three primary stock classes.
Common and preferred stocks
Preferred equities offer investors a fixed dividend payout each year, in contrast to regular stocks. While common stock is given preference when the company has excess money to distribute, preferred stock values are less volatile than common stock prices.
Some companies issue preferred stock with the option to convert it into common shares at a later date with certain conditions. They are also referred to as convertible preferred shares or hybrid stocks, and they may or may not have voting power.
Stocks that include integrated derivative options
Stocks that include an embedded derivative option might be “callable” or “putable” and are less frequently accessed. A “callable” stock has the option to be purchased back by the business for a specific price at a specific time. A “putable” stock functions similarly in that its owner has the choice to sell it to the company at a particular price and time.
4. Using dividend payments to classify stocks.
As long as shares are held, dividends serve as the main source of income. Stocks can be categorized according to the company’s dividend payout policy.
Growth stocks are the ones that don’t pay out much dividends because the company would rather reinvest its income to grow more quickly. Because of the company’s quick growth, the value of its shares increases, allowing investors to receive more returns and hence earn more money. Investors who are looking for long-term growth potential rather than an immediate second source of income might find it most suitable. Riskier than their counterparts, growth stocks.
A high-yielding equity investment known as an income stock is one that can produce income from most of the returns on the security as a whole. It is a very popular type of stock among investors due to its low uncertainty and higher-than-market profitability. Large, reputable companies with a proven track record of effectively managing their commercial operations and finances typically issue income stocks.
5. Stocks based on fundamentals
A share price, in the opinion of value investors, should be equivalent to the stock’s inherent value. To determine the intrinsic value per share, they compare recent share prices with earnings, profits, and other financial data per share.
- Shares are thought to be overvalued if their price is higher than their intrinsic value. The stock is viewed as undervalued if the price is higher than the intrinsic value, on the other hand.
- Value stocks are another name for undervalued equities. Value investors favor them because they think the stock price will eventually increase in the future.
6. Risk-based classification
The degree of risk associated with stocks varies depending on share price variations. Investors make more money when they buy in riskier equities, while doing the opposite with safer stocks.
The beta, or measure of risk, is obtained by calculating the stock’s price volatility. A stock’s beta, which indicates whether it moves in lockstep with or against the market, can be positive or negative. The stock’s risk quotient increases as beta increases. If the beta number is more than 1, the stock is considered to be more erratic than the market.
Blue Chip Stocks
Blue chip stocks are those of corporations with lower liabilities, reliable earnings, and a history of dividend payments. Investors looking for safer investment options may choose these very large, well-known corporations with a track record of strong financial performance.
7. Using price patterns to classify
This classification is based on how stock prices change in relation to or in contrast with business earnings for share market investing.
These equities are favored during difficult market conditions since they are mostly unaffected by economic circumstances. Food and beverage businesses are a typical illustration.
Cyclical equities are those of businesses that are significantly impacted by economic conditions and have significant price variations in response to market developments. These stocks expand quickly during boom cycles, but their expansion slows during recessions.
Investors have the option of purchasing various stock types directly or using ETFs to have cost-effective exposure to themed stock kinds. The details will help you choose the right stocks that suit your investment goals with the best mobile trading app.