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Now that you have knowledge on stocks, stock
market – Types and how it works it is time for you to know what the different
type of stocks that are available in the market which you as an investor can
invest in.
Stocks are classified into various types
which are
1. Stocks classified based on
ownership
These are stocks that provide different
rights and benefits based on the type of ownership. There are mainly 2 types of
stocks
a)
Common Stocks: Whenever anyone talks about
shares , what they are really talking about is common stocks. These are the
basic stock that is available in the market providing equity to the buyer
granting ownership in a company and a claim on a portion of the company’s net
profits. Common stockholders also have the right to elect the board members of
the company. These stocks will not provide any fixed income in the form of
dividends as it is not mandatory for the company to pay dividends. Instead the
buyer can sell the stocks for higher prices than what they bought it for making
profits.
b)
Preferred stocks: With a preferred stock
the stockholder does not have rights to vote for board members, but they still
do have an ownership in the company. With preferred shares the company promises
to pay the stockholder dividends at predetermined intervals based on the stocks
available to the holder. These shares have lower volatility and hence the
profits made are lesser. But incase the company is liquidated the preferred
share holders will be given priority over common stockholders to repay the
principle.
2. Based on Market
Capitalization
This means the size of the company which is
calculated by multiplying the number of outstanding shares by the current stock
price. There are 3 major kinds of stock based on Market Capitalization.
a)
Small Cap: These are companies which
have a market capitalization of up to Rs.250 crores. These are great options
for people who are looking to make great returns if they are willing to take
risk and not looking for any dividends. The small cap company stocks are
available at lower prices as they are mostly new to the industry and have a
chance to grow exponentially. On the other hand, the risk factor is that there
is a chance for these companies to also not do well which means that there is a
chance for the stockholder to take a hit.
b)
Mid Cap: These are companies ranging
from Rs.250 crores to Rs.5000 crores. They are seasoned veterans who have been
in the stock market for many years now. They have built reputation and still
have the potential to grow. This is the reason why these companies provide a
better opportunity to the investor as they are available for lower rates and
offer great returns.
c)
Large Cap: The largest companies present
in the industry like Reliance, Tata etc. are the ones who are grouped here
which are usually blue-chip firms. These companies due to the shear size and
market capital won’t have huge growth potential but are a safe bet for
investors as losing money from these stocks is highly unlikely. As the number
of shares available being high and also with less risk the company stock price
will be very high.
3. Based on the dividend
payed
These are stocks based on the returns they
provide through dividends. There are 2 major types.
a)
Income stocks: If you are looking for
continuous income in the form of dividends then this is the stock for you.
These are offered by reputed companies who are large and veterans who do not
use the entire profit earned into the business. Though the investors get
returns the company will not grow much reinvestment does not happen. The risk
involved with these shares are low.
b)
Growth stocks: These are offered by
companies who do not promise dividends regularly. The profits will be
reinvested in the company and hence the company has higher growth expectancy.
The only way investors of this stock make money is through the occasional
dividend paid or the stock holder selling the stock at a higher price than for
what it was bought for. The price of the stock will fluctuate continuously and
has higher risk factor.
Conclusion
You are now well versed in the basics of
stock market and the different type of stocks available for you to invest.
Check out our last part on the dos and don’ts in the stock market