Types and Classification of Stocks

Types and Classifications of Stocks - The Indian Trader

There are a lot of terms we read or hear when learning about the stock markets which has the word ‘stock’ in it. We might get confused between these terms. Here is an explanation of all such terms with the word ‘stock’.

Types of Stocks

There are two types of stocks, which based on the ownership rules. They are:

Common Stocks

  • They have voting rights on corporate matters.
  • Are the last to be paid out in the event of liquidation (when company is bankrupt and starts selling its assets to pay all liabilities)
  • Common stock holders have no promised or fixed dividends.

Preferred Stocks

  • These have no voting rights.
  • They have priority over Common Stocks in the event of liquidation.
  • Dividend is fixed for a preferred stock holder.

These are the two basic ‘types’ of stocks issued by a company. Now, we need to understand how the stocks of different companies are classified.

Classification of stocks

Classification of stocks of different companies based are on:

  1. Market Capitalisation
  2. Fundamentals
  3. Risk
  4. Dividend Payments
  5. Price Trends
  6. Others

Market Capitalisation

  • Small Cap
    • These are stocks of companies with market capitalization upto Rs. 3000 crores.
  • Large Cap
    • These are stocks of companies with market capitalization higher than Rs.10,000 crores.
  • Mid Cap
    • These are stocks of companies with market capitalization ranging from 3000 crores to 10000 crores.

Note: There is no standard fixed parameter for market capitalization. These are mentioned based on the general considerations.

Fundamentals

  • Overvalued Stocks
    • An overvalued stock is a stock that is selling at a price above what is considered as its intrinsic value.
  • Undervalued Stocks
    • An undervalued stock is a stock that is selling at a price below what is considered as its intrinsic value.

Risk

  • Blue Chip Stocks
    • These are stocks of companies that are well established, reputed, financially stable and strong.
    • The name blue chip comes from poker, as in poker, the blue chips are the most valuable.
    • These stocks have consistent performance in the stock market and hence these are considered risk free or safe investments.
  • Penny Stocks
    • There is no fixed definition for Penny Stocks. However, usually the stocks, which have price less than Rs. 20 – Rs. 25, are considered as Penny Stocks.
    • These stocks can give very high returns but also has very high risk too, as their price is very volatile.

Dividend Payments

  • Income Stocks
    • These stocks offer high dividends compared to their share price.
    • Dividend yield is used to measure or compare stocks that offer high dividends. (Dividend yield = Dividend announced / share price)
  • Growth Stocks
    • These stocks do not prefer to offer dividends on a regular basis but invest the money in company’s operations.
    • However, due to this investment by the company, value of the share rises (hence the name Growth Stocks) and the investor earns profit when the stock is sold.

Price Trends

  • Cyclical Stocks
    • These are stocks of companies whose profits (and thus the stock price) increases or decreases in correlation to the economic conditions. For e.g. Automobile Industry
  • Defensive Stocks
    • These are stocks of companies whose profits (and thus the stock price) is unaffected by the economic conditions. For e.g. Healthcare Industry

Others

  • Gold Stocks
    • These are stocks of the gold mining companies and their price moveup or down with the price of gold.
  • Treasury Stock
    • Treasury stock is a type of stock that has been bought back by the company that issued it.

These classifications are done for better comparison and understanding of stocks in stock market.

So, there you have it. All the stock types explained and classified.

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