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Either one comes as an investor or as a trader in the stock market. They need to know about different types of stocks in the share market. If not for a trader, it is a must for an investor to know about types of stocks. It doesn’t only help you to increase your basic knowledge about the stock market but also allows you to make investment decisions.
So, here are the different types of stocks in the share market which will help you in your learning journey.
But, before moving ahead, let’s know what a stock is. As many people tend to use the term ‘stock’ and ‘share’ interchangeably.
What is Stock
A stock refers to the company that issues it which means stocks are indicated by the name of the company. For instance stock of TCS, stock of Infosys, stock of Dmart, etc.
Classification of Stocks
Stocks can be classified into multiple categories on various parameters:
- The market capitalization of the company
- Company’s size
- Frequency of dividend payment by the company
- The intrinsic value of a company’s share
- Investment methods used by investors
- Price trend of company’s share
- Shareholder’s Ownership of shares
Types of Stocks based on Market Capitalization
Here, market capitalization is the center point of our discussion. So, it becomes very important for us to know what this center point means.
The market capitalization of a company is its share price multiplied by the total number of outstanding shares.
1. Large-cap Stocks
Top 100 companies, as per market cap, are considered large-cap stocks. These 100 companies have a market capitalization of more than Rs.20,000 crore.
Large-cap stocks provide a high dividend yield and are less riskier than mid-cap and small-cap stocks. As the large-cap stocks are the established enterprises that have high cash reserves, they are considered stable stocks i.e. they experience less volatility.
2. Mid-cap Stocks
Companies that range from 101 to 250 ranking, as per market cap, are considered mid-cap stocks. These 150 companies possess a market capitalization of less than Rs.20,000 crore but more than Rs.5,000 crore.
Mid-cap stocks also possess reasonable reserves as they are in the growing stage of their business but you can’t guarantee their stability and they may suffer the volatility in the market.
3. Small-cap Stocks
Small-cap stocks are the companies that rank above 250 i.e. 251 and onwards, as per market cap. These companies have a market capitalization of less than Rs.5,000 crore.
Small-cap stocks consist of high volatility factors hence investors who believe in the long-term success of their business and can take high risks invest in small-cap stocks.
Types of Stocks based on Size of Company
1. Blue-chip Stocks
Large-cap stocks are blue-chip stocks. You’ve read that large-cap stocks are the established companies having stable earnings and good operating business, the companies with large market capitalization would have a large size of business.
So, blue-chip stocks are large-cap stocks and large-cap stocks are blue-chip stocks.
2. Penny Stocks
Penny stocks are small and low-quality companies whose shares are traded at dirt cheap prices. Investors who believe in the business model of those companies invest in these companies.
Several times the investors succeed with their faith in business but most of the time they lose money because of the speculative business models of such companies.
Types of Stocks based on Dividend Payment
1. Dividend Stocks
Companies that give dividends to their shareholders on regular basis i.e. monthly, quarterly or annual basis are considered dividend stocks. These companies pay higher dividends in comparison to other companies in the market.
Apart from share capital appreciation, dividend stocks offer handsome dividends amount as an income to the shareholders, they are also known as ‘Income Stocks’.
‘Dividend yield stocks’ is another name used for dividend stocks. Reason? High dividend, high dividend yield.
2. Non-dividend Stocks
Companies that never or occasionally distribute dividends to their shareholders, fall into the category of non-dividend stocks.
One should not interpret that if a company isn’t giving dividends then it must be a poor company. Don’t do that. The fact is some of the biggest companies in the world don’t give dividends as they reinvest that money in their business for its expansion.
Types of Stocks based on Intrinsic Value
Value investors use a unique term ‘intrinsic value’ which comes after a good length of calculation and give the actual value of the company’s share that’s why intrinsic value is also known as ‘True value’ or ‘Real value’ i.e. the true value of a stock.
Value investors are the type of investors who use a specific investment method called 'value investing'. In value investing, investors compare the share's current price with its actual value and then take decision.
1. Undervalued Stocks
Stocks whose share price is greater than their intrinsic value are known as undervalued stocks. Value investors seek these types of stocks to create fortunes.
Value investors believe that the stocks that are now undervalued will increase in price in the future and with this mentality, they buy the shares of that company, hold them for a period and then when the time comes they sell the shares and earn a good return as capital appreciation.
2. Overvalued Stocks
These are the stocks with a share price that exceeds their intrinsic value and are considered overvalued. They are of no use to value investors.
Types of Stocks based on Investment Methods
1. Growth Stocks
Growth stocks are the companies that focus on their growth. And to enable them to grow they prefer to reinvest whatever the profits they generate in their business and this is the reason why growth stocks do not pay high dividends.
Growth stocks are the good news for the investors who seek long-term growth potential and bad news for the investors who want an immediate second source of income as regular dividends.
2. Value Stocks
We’ve just read about undervalued stocks. Yes! Value stocks are another name for undervalued stocks.
The name, ‘value stock’ is given because value investors only value the stocks that are undervalued. So, Value stocks = Undervalued stocks.
Types of Stocks based on Price Trend
1. Cyclical Stocks
Cyclical stocks get easily affected by economic conditions or trends and suffer high price fluctuations with market changes.
During the phase of a booming economy, these stocks grow rapidly but during a slow economy, they also get slowed down.
Companies in the automobile sector, aviation sector, manufacturing sector, etc. are considered cyclical stocks.
2. Non-cyclical Stocks
Stocks whose share prices don’t fluctuate with the up and down trend of economic conditions are classified as ‘non-cyclical stocks.
Non-cyclical stocks are also known as ‘Defensive stocks’ and ‘Secular stocks’.
Stocks of the insurance sector, FMCG (Fast-moving consumer goods), and pharma sector come in the category of defensive stocks.
1. Common Stocks
Shares that the equity shareholders own are known as common stocks or common shares. Owning the common stocks gives the voting right to the equity shareholders.
Shareholders of common stocks are eligible for the regular dividends distributed by the company.
2. Preferred Stocks
Preferred stocks or preference shares have preference over the common shares that is the preference shareholders get their part before the equity shareholders and after the creditors and bondholders of the company during the liquidation of the company.
The company gives a fixed dividend to preference shareholders and it acts as a fixed income for them but they are not given any voting rights.
Preferred stocks are less risky than common stocks as they are given preference in case of bankruptcy.
3. Hybrid Stocks
Stocks that consist of the characteristic of both common and preferred stocks are known as hybrid stocks.
Preferred stocks that come with the facility to convert a fixed number of common stocks come under the category of hybrid stocks. ‘Convertible preference share’ is another name for hybrid stock.
Stocks and shares have different meanings. We see different types of stocks in the share market and these stock types have various classes under which they fall.
Stocks can be classified based on dividend payout, market capitalization, and five other parameters.
An investor needs to know the types of stocks in the share market to get a deep understanding of the share market.
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