Stocks are known as the most lucrative investments with the techniques for handling the risks involved in the stock market. Every stock may not align with your financial objectives. To pick the right type of stock, go through the explanation of different types of stocks available in the stock market and make informed investment decisions.
How are different types of stocks classified?
Look at the details of different types of stocks classified under the following categories:
Preferred Stocks: Preferred stocks do not possess voting rights for their shareholders. They can get guaranteed dividends. Preferred stockholders will get priority to be paid over common stockholders if a company is in a position of insolvency.
Common Stocks: Common stockholders possess voting rights also for corporate decisions and get a share of the company’s profits. Common stockholders can earn dividends, but they are not guaranteed. They are paid last if a company goes bankrupt.
Hybrid Stocks: Hybrid Stocks are stocks with a convertible option. Companies allow shareholders to convert their preferred stocks into common stocks. The company may or may not offer voting rights against these shares.
2. Size of the company – Market Capitalisation
Large-cap stocks: These are the shares of companies with a valuation of above Rs.4,000. These are blue-chip stocks and top 100 companies on exchanges as per SEBI’s rules, such as Reliance Industries, TCS, Infosys, etc. The share price of large-cap stocks remains stable even during the volatile market. Large-cap are less risky as compared to mid and small-cap stocks. Therefore, they are preferred by conservative investors.
Mid-cap stocks: These are stocks of companies growing steadily but have a low market capitalisation. The market cap ranges between INR 250-4000 crores. Mid-cap companies ranked 101 – 250 on stock exchanges. These companies have the scope for further growth and offer higher returns. Aggressive investors prefer these stocks.
Small-cap stocks: These stocks are highly volatile. These companies’ market cap is below Rs. 250 crores. These companies are ranked from 251st onwards. These stocks are suitable for long term investors with a high-risk appetite looking for high growth investment. They can be on the list of upcoming IPOs.
Income Stocks: These are the stocks of companies distributing regular dividends. These stocks are called dividend-yield stocks. These are less risky stocks and can be your secondary source of income.
Growth Stocks: Growth stocks reinvest the profits in their projects and usually do not offer dividends. With a reinvestment of earnings, companies can grow faster. Here investors can earn through a rise in stock price.
Blue-chip Stock: These are the stocks of well-established companies that can bring stability to your portfolio with stable returns. Generally, these companies do not have many debts to pay and therefore, their investors can get regular dividends. These are less risky as these companies can sustain during the volatile market also.
Beta Stocks: ‘Beta’ is a measure of risk that can be positive or negative. When the market and the stock move in the same direction, it is a positive beta. In contrast, a negative Beta means both are moving in opposite directions. High beta stocks are considered great investments in bull markets.
5. Price Trends
Cyclical Stocks: These stocks experience high price fluctuations due to the changing economic environment. When the economy starts to boom, these shares tend to rise, for example, Airline Industry and Automobile industry.
Defensive Stocks: Defensive stocks stay unaffected by the country’s economic conditions, for example, the FMCG sector, Pharmaceuticals and insurance companies.
Such fundamental concepts on stocks can help investors make the right investments in the Indian stock market. While opening an online trading account, make sure you have determined your financial goals to be achieved through stock trading. It will help you to choose the right stockbroker. A long-term investor can open a free demat account with a discount broker.