Investing in stocks provides several opportunities with high returns. But, before you invest, you must understand different types of stocks. This will help you gain knowledge so that you can make better decisions.
How are different stocks categorised?
The shares or stocks indicate ownership in a publicly listed company. When investors buy shares, they become shareholders. The stocks can be categorised based on several factors.
They include risk or volatility, fundamentals, economic trends, market capitalisation, ownership, etc. So, you must know every type of stock in detail. Let’s know that!
Types of stocks based on market capitalisation
A popular parameter to classify stocks is market capitalisation. It refers to the company’s total market value. Here are three types of stocks based on market capitalisation:
- Large cap: These stocks are more stable and less risky. These companies are typically established with a stable track record.
- Mid cap: Mid-cap stocks have a higher growth rate than large-cap stocks. Some specific industry trends and economic cycles affect these stocks and make them volatile.
- Small cap: Small stocks refer to companies with a rank below 250. Since its liquidity and market value are low, they are volatile.
Types of stocks based on fundamentals
Investors need to check the fundamentals of a company before investing. There are two different types of stocks based on the fundamentals.
- Overvalued stocks: Stocks that generally trade at a higher price than their intrinsic value are called overvalued stocks.
- Undervalued stocks: Undervalued stocks trade at a lower price than intrinsic value.
Types of stocks based on risk or volatility
A stock becomes risky when the price of the stock changes. Here are the types of stocks based on the volatility or risk:
- Beta stocks: Beta measures the volatility of a stock. High-beta stocks are more volatile while low-beta stocks tend to be less volatile.
- Blue-chip stocks: Blue-chip stocks are the shares of well-established companies with stable dividends and earnings. They are considered less risky.
Types of stocks based on ownership
Ownership rules are another way to classify stocks. It is all about understanding the privileges and rights that come with owning a specific stock. The following are the different kinds of stocks based on ownership:
- Common stocks: The common stocks provide dividends to shareholders which are the parts of profits of the company.
- Preferred stocks: These stocks provide priority over common stocks in terms of asset distribution and dividend payments.
- Mixed stocks: The characteristics of common and preferred stocks are present in mixed or hybrid stocks. It allows investors to change their bonds into equity or debt.
Types of stocks based on profit sharing/ payouts- income stocks and growth stocks
Stocks also differ in their specific approach to payouts or profit sharing. The types of stocks included in this-
- Income stocks: The dividend stocks or income stocks prioritise the regular dividend payments to shareholders.
- Growth stocks: The growth stocks again invest most of their profits into their companies to have more expansion. It increases its potential for higher capital appreciation and lower dividend yield.
Types of stocks-based economic/price trends
The stock’s price may change because of the changing market conditions. So, stocks can be classified based on price or economic trends as well.
- Cyclical Stocks: These stocks are sensitive to economic cycles. They perform well during the time of economic expansion.
- Defensive stocks: The economic downturns affect defensive stocks and they provide better returns.
Conclusion
Understanding stock types helps investors to manage their investment portfolios. Remember, every stock type is suitable for a specific investment strategy or market condition. So, do your research and then invest.
