Everyone wants to know which shares to buy when their prices rise. Stock markets drive the economic growth of a country. A vibrant stock market is essential for a developing country like India. It strengthens the overall financial market. Investing in stocks is one of the ways to participate in the financial market. However, you should be aware that there are different types of stocks. Let’s learn about them in this blog.
Key Highlights
There are several types of stocks in the share market based on different parameters.
Stocks are usually divided based on ownership, market capitalisation, and dividend payments.
The price of some stocks usually depends on supply and demand dynamics. On the other hand, economic conditions affect the cost of a few stocks.
There are various types of stocks in the stock market. They are divided based on different parameters. They are as follows.
Ownership rules are the most fundamental criteria for classifying stocks. Two factors are considered here: the rights and privileges of a stock. Based on ownership, the different types of stocks are as follows.
Types of Stock
Common Stock
Ownership Rules
Common stocks offer dividends to shareholders. Dividends are a portion of the company's profits. In India, these are the most popular types of stocks.
Types of Stock
Preferential Stock
Ownership Rules
Preferential stocks give assured dividends. Additionally, Preferential stocks have higher priority than common stocks in case of liquidation.
Types of Stock
Mixed Stocks
Ownership Rules
Preferred and common stock characteristics are combined in hybrid stocks. Convertible bonds, which enable investors to change their bonds into debt or equity, are the most popular kind.
Types of Stock
Convertible Preference Shares
Ownership Rules
These are first issued as preference stocks. After a while, they are converted to a predetermined number of common stocks. A company may or may not give voting rights with such stocks.
Types of Stock
Stocks With Embedded Derivative Options
Ownership Rules
Typically, a firm only buys back its shares if it feels it is appropriate to do so. Yet, some firms offer stocks that have call-able or put-able embedded derivative options. A call option allows the firm to repurchase its stock at a certain price or on a predetermined date. With a put option, the shareholder can sell the shares back to the firm at a specific price or at a predetermined time. Companies usually don't issue such stocks.
Types of Stock | Ownership Rules |
---|---|
Common Stock | Common stocks offer dividends to shareholders. Dividends are a portion of the company's profits. In India, these are the most popular types of stocks. |
Preferential Stock | Preferential stocks give assured dividends. Additionally, Preferential stocks have higher priority than common stocks in case of liquidation. |
Mixed Stocks | Preferred and common stock characteristics are combined in hybrid stocks. Convertible bonds, which enable investors to change their bonds into debt or equity, are the most popular kind. |
Convertible Preference Shares | These are first issued as preference stocks. After a while, they are converted to a predetermined number of common stocks. A company may or may not give voting rights with such stocks. |
Stocks With Embedded Derivative Options | Typically, a firm only buys back its shares if it feels it is appropriate to do so. Yet, some firms offer stocks that have call-able or put-able embedded derivative options. A call option allows the firm to repurchase its stock at a certain price or on a predetermined date. With a put option, the shareholder can sell the shares back to the firm at a specific price or at a predetermined time. Companies usually don't issue such stocks. |
Market capitalisation is the total value of all the shares of a company. The following are the three categories of stocks based on market capitalisation.
Types of Stock
Large-cap Stocks
Market Capitalisation
They are the top 100 companies in terms of market capitalisation. They are usually less risky and more stable.
Types of Stock
Mid-cap Stocks
Market Capitalisation
Stocks ranked between 101 and 250 based on market capitalization. They generally have slightly higher growth rates compared to large-cap stocks. The economic cycles and specific industry trends affect them more quickly. This makes them volatile
Types of Stock
Small-cap Stocks
Market Capitalisation
All other companies below the 250 rank are small-cap stocks. They are very volatile as their market value and liquidity is quite low.
Types of Stock | Market Capitalisation |
---|---|
Large-cap Stocks | They are the top 100 companies in terms of market capitalisation. They are usually less risky and more stable. |
Mid-cap Stocks | Stocks ranked between 101 and 250 based on market capitalization. They generally have slightly higher growth rates compared to large-cap stocks. The economic cycles and specific industry trends affect them more quickly. This makes them volatile |
Small-cap Stocks | All other companies below the 250 rank are small-cap stocks. They are very volatile as their market value and liquidity is quite low. |
Dividends are the profits of a company that are shared with the shareholders. The stocks based on dividend payments include the following ones.
Types of Stock
Income stocks
Dividend Payments
Income stocks give dividends regularly. They have the potential to increase a shareholder's income. Hence, they are known as income stocks. Financially sound companies often hold such stocks. However, these firms grow slowly as profits are usually distributed.
Types of Stock
Growth stocks
Dividend Payments
Growth stocks do not offer dividends. Rather, the firm uses its revenues for business expansion. Therefore, the value of these stocks rises quickly. Investors only get returns if the market value of the stock increases. Hence, these stocks are more risky.
Types of Stock | Dividend Payments |
---|---|
Income stocks | Income stocks give dividends regularly. They have the potential to increase a shareholder's income. Hence, they are known as income stocks. Financially sound companies often hold such stocks. However, these firms grow slowly as profits are usually distributed. |
Growth stocks | Growth stocks do not offer dividends. Rather, the firm uses its revenues for business expansion. Therefore, the value of these stocks rises quickly. Investors only get returns if the market value of the stock increases. Hence, these stocks are more risky. |
The market value of stocks depends on their demand and supply. However, investors need to analyse the fundamentals of a company. Based on this, stocks are of two types.
Types of Stock
Overvalued Stocks
Fundamentals
You can’t determine the market price of these stocks from their expected earnings. Thus, the market price of these stocks is more than the intrinsic value.
Types of Stock
Undervalued Stocks
Fundamentals
The market value of these stocks is less than the intrinsic value
Types of Stock | Fundamentals |
---|---|
Overvalued Stocks | You can’t determine the market price of these stocks from their expected earnings. Thus, the market price of these stocks is more than the intrinsic value. |
Undervalued Stocks | The market value of these stocks is less than the intrinsic value |
A stock will be risky if its price changes very quickly. Based on risk, stocks are usually divided into the following types.
Types of Stock
Beta Stocks
Risk
Beta is a financial ratio used to measure the volatility of stock prices. A higher beta suggests that a stock is more risky.
Types of Stock
Blue-Chip Stocks
Risk
These are stocks of large and established companies. Their stock prices are usually stable.
Types of Stock | Risk |
---|---|
Beta Stocks | Beta is a financial ratio used to measure the volatility of stock prices. A higher beta suggests that a stock is more risky. |
Blue-Chip Stocks | These are stocks of large and established companies. Their stock prices are usually stable. |
The price of stocks may change due to changes in market conditions. There are two types of stocks based on their response to price trends. They include the following.
Types of Stock
Cyclical Stocks
Price Trends
The price of cyclical stocks changes as per the economic conditions. Their prices fall when the economy doesn’t perform well. Investors may invest in these stocks when the economy's performance is very good.
Types of Stock
Defensive Stocks
Price Trends
These stocks are highly dependent on the economy’s performance. Stocks of food and insurance companies are some examples. They are generally a safe investment option.
Types of Stock | Price Trends |
---|---|
Cyclical Stocks | The price of cyclical stocks changes as per the economic conditions. Their prices fall when the economy doesn’t perform well. Investors may invest in these stocks when the economy's performance is very good. |
Defensive Stocks | These stocks are highly dependent on the economy’s performance. Stocks of food and insurance companies are some examples. They are generally a safe investment option. |
There are several types of stocks. Understanding types of shares properly allows investors to manage the portfolio risk and make the right investment decisions. Each type of stock can be suitable for a specific market condition or investment strategy. Hence, investors can take advantage of the wide variety of stocks available. However, remember that the appropriate stocks rely on your investment strategy and risk tolerance. Always consider these factors while investing in any stock.
The types of stocks are common stock, preferred stock, large-cap stocks, mid-cap stocks, small-cap stocks, domestic stock, international stocks, growth stocks, value stocks, IPO stocks, dividend stocks, non-dividend stocks, cyclical stocks, non-cyclical stocks, safe stocks, income stocks, Blue chip stocks, ESG stocks, and Penny stocks.
The types of stocks based on market capitalization are Large, mid, and small-cap.
The classification of stocks is primarily based on ownership rules, market capitalisation, dividend payments, fundamentals, risk, and price trends.
Preferred stock gives its holders priority over the company's earnings but does not give them voting rights like a common stock.
A detailed list of the stocks available on a particular exchange and their issuers.
Common stock is the most common type of stock issued by companies.