Different Types Of Stocks For Investors

So, before understanding what types of stocks or shares. Let us know What exactly are stocks? In simple words, If you buy a stock or share of a company, you have purchased a unit of ownership of the company. You are a shareholder of the company. The more shares you hold, the more percentage of the company you own.

The main reason to buy a share of a company is to make money. If the company makes a profit, the shareholder of that company gets dividend payments, or the shareholder can simply sell them to make a profit.

Now let’s look into types of shares available in the market for investors-

  1. Based on Stock Classes: This is one of the main factors used to classify stocks. These types of stocks are based on the voting rights of shareholders. Not every stock gives voting rights to a shareholder. Voting rights gives the power to the shareholder to vote in the company’s annual meetings and take decisions regarding the company’s management.
  2. Based on Market Capitalisation: Stocks are classified based on the market value of the total shareholding of a company. To calculate it, you multiply the share price by the total number of issued shares. Stocks can be classified into three categories based on the market capitalisation of the company:
  • Large-Cap Stocks- These are the stocks of Blue-chip firms, which are usually quite established and have good financial cash flow. These stocks allow investors to get higher dividends and maintain capital for an extended period.
  • Mid-Cap Stocks- These stocks are basically medium-sized companies with a market capitalisation of Rs 250 to Rs 4000 crores. These stocks have the potential for moderate growth as well as the stability of a big company. In the long run, these stocks do and grow well.
  • Small-Cap Stocks– As the name suggests, these stocks represent small-size companies. Such companies can perform well and show good growth in the future. However, these stocks are highly volatile and may decrease in value at any time.
  • Based on Ownership– There are three types of stocks based on ownership:
  • Preferred & common stocks- Preferred stocks promise investors a fixed dividend amount every year, unlike common stocks. Due to this, the price of preferred stock is not as volatile as that of common stock.
  • Hybrid Stocks- These stocks are generally preferred shares that come with an option to be converted into a fixed number of common stocks at a particular time.
  • Stocks with embedded-derivative options- These stocks come with an embedded derivative option, meaning they can be ‘callable’ or ‘putable’. A ‘callable’ stock has an option of buyback at a particular time, and A ‘putable’ stock offers the stockholder to sell it back to the company at a specific time.
  • Based on Dividend Payment– Dividends are the primary source of income until a share is sold. These Stocks are classified into two types:
  • Growth Stocks- These stocks do not pay many dividends as companies prefer to reinvest their earnings for company operations. This helps the company grow fastly. Such stocks are called growth stocks.
  • Income stocks- These stocks give a higher dividend compared to their share price. This is why these stocks are called income stocks.
  • Based on fundamentals– Companies compare recent share prices with per-share earnings, profits, and other financials to get the intrinsic value per share. The value is categorised into two parts:
  • Overvalued Shares- These types of shares have exceeded the intrinsic value and are considered overvalued.

Undervalued Shares: These types of shares are preferred by value investors as they believe that the share price would rise in the future.

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