Before we get on with the different types of stocks, let us have a basic understanding of what stocks are. A stock, also called a share, is a financial instrument which represents ownership in a company or corporation. It illustrates a proportionate claim on its assets and earnings.
What is Stock Market?
Stock markets can be referred to public markets where shares of public listed companies are traded. An efficiently functioning stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public.
What are the different types of stocks?
The different types of stocks are classified on the basis of size of the company, dividend payment, industry, risk, volatility as well as fundamentals.
1) Stocks on the basis of ownership
Based on the ownership, there are three types of stocks which can be classified:
a) Preferred or common stocks
The basic difference between preferred and common stocks lies in the promised dividend payments. Preferred investors offer investors a fixed number of dividends yearly unlike common stocks. For this reason, the price of a preferred stock is not as volatile as that of a common stock.
Common stock holder enjoy voting rights while privilege preferred shareholders do not.
b) Hybrid stocks
Hybrid stocks refer to those shares which come with the option of being converted to common stocks with conditions at a certain point of time. These may or may not include voting rights.
c) Stocks with embedded derivative options
Some stocks come with embedded derivative options which means that they can be ‘callable’ or ‘putable.’ A ‘callable’ stock is one which has the option to be bought back by the company at a certain price or time. A ‘putable’ share gives the stockholder the option to sell it to the company at a prescribed time or price. These kinds of stocks are not commonly available.
2) Stocks on the basis of dividend payment.
Dividends are the primary source of income until the shares are sold for a profit. Stocks can be classified on the basis of how much dividend the company pays.
a) Growth Stocks
A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. Growth stocks have extremely high risk but their returns can be really attractive.
b) Income stocks
These are stocks that distribute a higher dividend in relation to their share price. They are also called dividend-yield or dog stocks. So, a higher dividend means larger income. This is why these stocks are also called income stocks.
3) Classification on the basis of market capitalization
a) Large cap stocks
These are the stocks of blue-chip firms which have successfully established themselves in the market. Due to their large sizes, these firms have large reserves of cash at their disposal to explore new business opportunities.
b) Mid cap stocks
These are the stocks of medium sized companies which have a market capitalization range of $2 billion to $10 billion.
Mid cap companies have a good track record of steady growth and are very similar to blue chip stocks barring their size. In the long term these stocks do and grow well.
c) Small cap stocks
These are the stocks of small sized companies comparatively in the market which have a market capitalization of $300 million to $2 billion. Because these small cap companies are new, they are highly volatile and their growth impacts the value and revenue of the company to a huge extent.
4) Stocks on the basis of fundamentals
a) Overvalued stocks
These are stocks where the share price exceeds the intrinsic value, hence its name.
b) Undervalued stocks
These are stocks where the price is lower than the intrinsic value. These are also referred to as ‘value stocks.’
5) Stocks on the basis of risk
Some stocks are riskier than the others. But it is also important to take into account that risky stocks have the potential of generating you more profits whereas low risk stocks will give you lower returns.
a) Blue chip stocks
Blue chip stocks are stocks of those companies that have lower liabilities and stable earnings and which pay regular dividends.
b) Beta stocks
By calculating the price vitality of the stocks, the beta or the measure of risk is calculated. The higher the beta, higher is the risk quotient of the stock. If the beta value is more than 1 it means that the stock is more volatile than the market. A lot of investors with knowledge of this measure use it to make their investment decisions.
6) Stocks on the basis of price trends
a) Defensive stocks
Economic conditions do not much impact these stocks and as a result of which these are preferred during poor market conditions.
b) Cyclical stocks
These are those stocks which are affected by the economic conditions and show high price fluctuations with market changes.
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