There are various types of stocks one can trade-in, in India. A stock is basically the collective term for shares.
A single share of the stock represents ownership of a corporation in fractional terms.
The more stocks you hold of a company, the higher your share or ownership in the company.
These stocks are primarily traded on two stock exchanges in India, the National Stock Exchange and the Bombay Stock Exchange.
Companies that list their shares for the first time do it in the primary market. However, the secondary market allows investors to buy and sell shares of already-listed companies.
Stocks in India are classified based on 7 different aspects. These aspects are –
Based on stock classes/voting rights:
This classification is based on the voting rights of the shareholders.
- Some stocks do not give the shareholders the power to vote at the annual meeting. Hence, they have no say in management decisions.
- Whereas some stocks allow shareholders to participate in the decision processes fully.
They have proper voting rights, and their opinions matter before taking any management decision.
For example, Tata Motors, Pantaloons Retail India, both these company’s stocks provide their shareholders with voting rights.
- Some stocks also allow shareholders to cast multiple votes in different company matters.
Based on price trends:
Some stocks are classified based on price trends. They depend on the movement of stock prices with or against the company’s earnings.
There are 2 major types of such stocks –
- Defensive stocks: These stocks are mostly unfazed by the economic and/or financial conditions.
They are considered when the market is in the bear phase, i.e., low or poor. For example, food and beverage companies fall under this category.
- Cyclical stocks: Company stocks that are highly affected by the country’s economic and/or financial conditions see high fluctuations with market changes. These are cyclical stocks.
These stocks grow rapidly during the boom period, and their growth is slow in a slow economy.
So, we can say that they work in sync with economic conditions. Automobile stocks are an example of this category’s stocks.
Based on dividend payment:
A dividend is basically a share of profit distributed by the company to its shareholders. Sometimes it is high, sometimes low.
Sometimes it is fixed, and sometimes it depends on the profit of the year.
- Growth stocks: One invests in these stocks to profit from a reinvestment in the company. They do not pay high dividends. However, the reinvestment allows the company to grow faster; hence, the name.
The value of shares also grows rapidly with the company’s growth rate. It allows the investors to profit through higher returns (i.e. the difference between the price they bought the share at and the current price of the share).
It is best suited for investors seeking long-term growth potential. The ones looking for an immediate source of income or passive income should not really rely much on these shares.
They also carry a higher risk than others.
- Income stocks: These stocks pay a higher dividend compared to growth stocks.
Higher dividend results in higher income, hence, the name.
These are offered by a stable company that can afford consistent dividends. But these companies also do not offer very high growth in the future.
These stocks are a good investment for anybody looking for a secondary source of income.
The dividend income is not taxed and great for risk-averse investors.
Based on market capitalization:
The market capitalization of any company is its total shareholding.
The calculation of it is by multiplying the company’s current stock price with the total number of outstanding shares in the market.
These are the 3 main types of stocks based on market capitalization –
- Large-cap stocks: These are the stocks of established enterprises having large reserves of cash.
They are blue-chip companies and highly reputed. These stocks come with the benefit of reaping higher dividends.
ICICI Bank, Bharti Airtel, and Coal India are some examples of large-cap stocks in India.
- Mid-cap stocks: These are the stocks of medium size companies.
They have a market cap of INR 250 crore to INR 4,000 crore.
These companies have high growth potential and a recognized name in the market.
Relaxo Footwears and Polycab India are some of the mid-cap stocks one can trade-in.
Below is a list of the top-performing mid and large-cap stocks in 2020-21.
- Small-cap stocks: These stocks have the smallest size in the market.
However, this does not mean that they cannot outperform the large-cap stocks. They surely can!
Only the company size is small, having a market capitalization of up to INR 250 crore.
If you are someone who is looking to commit long term without having particular current dividend goals, small-cap stocks are for you.
They have good growth potential and witness significant gains amidst the price volatility. These companies are relatively new in the market.
Bajaj Consumer Care is a good small-cap stock for an investor looking for long-term growth and potential gains.
Based on ownership:
There are 3 types of stocks based on ownership, which offer the investors different rights and growth potential in the long term.
- Preferred and common stocks: Preferred stocks offer the investors a fixed sum of dividend every year, irrespective of their profit. Common stocks, however, on the other hand, do not provide a fixed dividend every year.
Price volatility in preferred stocks is lesser than in common stocks. Common stocks always get the benefit on a priority basis whenever the company has more surplus to disburse.
Common stockholders have voting rights; however, the preferred stock owners do not.
Preference shares are further divided into 3 categories –
- Cumulative preference shares: They give the holder the right to all the dividends which have come down in the past. This way, the shareholder never really loses his/her share of dividends.
- Non-cumulative preference shares: As the name suggests, these shares do not accumulate dividends. This is because these profits go out of the company’s current year’s profits. Hence, outstanding dividends in case of loses are not a supposed claim in the coming years.
- Redeemable preference shares: These shares have a callable option. The company can redeem these profits later. The company pre-concludes the price at which they buy back the shares.
- Hybrid stocks: Some companies offer preferred shares along with an option of converting them into common stocks later.
These do involve certain conditions, such as the conversion ratio to be set by the company itself.
They are also called convertible preferred stocks, and they sometimes have voting rights and sometimes do not.
Stocks with embedded derivative option: Such stocks are not commonly available and are ‘callable’ or ‘putable’.
This means a callable stock has the option of buying repurchased by the company immediately, for a certain price at a certain point in time.
However, a putable stock offers its holder to sell it to the company at any point in time, at a certain price.
Based on fundamentals:
Many investors believe that the share price should be equal to the intrinsic value of the share.
The intrinsic value of any share is the objective value of the asset, i.e., the stock.
Such shares are of 2 types –
- Overvalued shares: These stocks exceed the intrinsic value and hence considered over-valued.
- Undervalued shares: When any share’s market price is less than its intrinsic value, it is an undervalue of the share. These are a good buy!
Based on risk:
The riskiness of a stock highly depends on its price fluctuations. The volatile stocks are risky, and the ones that are not are fairly safe.
However, riskier stocks offer higher returns to the investors and stocks, which are low risk, generate low returns.
Every investor is either of the two types. One is a risk-averse investor who does not want to take many risks and wants to invest in safe funds.
They do not want high returns but stable returns.
On the other hand, some investors have a high-risk appetite and are ready to invest in risky stocks. They thrive on getting the most returns out of those stocks and do not worry about losing as much.
Based on this, stocks are classified as below –
- Beta stocks: The beta is also called the measure of risk. You get the beta by calculating the price volatility of the stock/share.
If the beta is positive, it means that the stock is moving in sync with the market. If the beta is negative, it means that the stock is moving against it. The higher the beta, the higher the risk.
If the beta value comes out to be more than 1, it denotes high risk and that the stock is very volatile in the market.
Investors who have beta knowledge make decisions accordingly.
- Blue-chip stocks: These are those company’s stocks that have lower liability and stable earnings.
These are well-recognized companies and are not very risky to invest in. They also pay regular dividends, so it is suitable for an investor looking for a regular source of secondary income.
These companies are a fantastic bet for individuals who seek safer avenues of investment with sound and financially stable firms.
We have studied numerous types of stocks above, which proves that there are types of stocks for every type of investor in the market.
People looking to invest for the long term, for the short term, investors seeking high risk and low risk, investors that need a stable source of secondary income and investors who do not care much about fixed dividends.
No matter which type of investor you are, aggressive or subtle, there are plenty of options in the stock market for you to choose from.
There are multiple combinations of stocks with different pros and cons that benefit you and have an opportunity cost.
According to your suitability and what you are looking at, you can look at different stocks and invest in them considering your risk appetite and financial goals!