If you want to create wealth in the long term then the share market is the ultimate destination for this purpose because it is a huge ocean of money provided you are acquainted with its fundamental rules of it. By investing in the share market, you actually acquire partial ownership of the company in terms of its stocks or shares.
But if you are well versed with the investment and market-related terms, then you must have come across different types of stocks generally people talk about while parking their money. Stock is stock, then why are there so many different nomenclature or categories we encounter when asking somebody about the planning of personal finance?
Types of Stocks you can invest in
Stocks are normally categorized into 10+ categories but here we will discuss only those which are very common and you listen about them very frequently. Major types of stocks are:
Stocks as per market Cap
Market capitalization is a very common and basic term that means the overall value of the company including all of its assets. So a company can have a market cap ranging from 5 Crore to 20000+ crores depending on its size and valuation of it. Accordingly, the stocks of companies are categorized as per this yardstick of market cap, however, the scale of the cap may be changed by the market.
Small cap stocks
Small cap stocks are the stocks of small companies which have a market capitalization of fewer than 5000 crores. These are the companies that are either new or less established and as small-cap stocks have less experience in the market, hence they have more risks associated with them in comparison to big companies. But at the same time, small-cap companies have long ways to go in the market, so they have maximum scope of growth ahead. So, your investment in small-cap stock will also have large scope for growth. NALCO and Trident are the best examples of large-cap companies.
Medium cap stocks
Medium Cap Stocks are the stocks of such companies or firms which have a market capitalization between 5000 to 20000 crores. These are the companies that are well established and as medium-cap stocks have enough experience in the market, hence they have fewer risks associated with them in comparison to small-cap stocks. But at the same time, medium-cap companies have a long way to go in the market, so they have a good scope of growth ahead. So, your investment in medium-cap stock will also have better scope for growth. HDFC Banks and Escort are the best examples of Mid-cap companies.
Large Cap Stocks are the stocks of well-established large companies which have a market capitalization of more than 20000 crores. These are the companies that are well established and old in the operational field and as large-cap stocks have maximum experience of the market, hence they have very minimal or negligible risks associated with them in comparison to other small and mid-cap companies. But at the same time, the large-cap companies are nearly at their peaks so have less scope for growth ahead as compared to mid and small-cap companies. Reliance Industries and HUL are the best examples of large-cap companies.
Stocks based on voting Rights:
Being a shareholder, you get some voting rights in the affairs of the company and the gravity of these voting rights may be different for different investors depending on the type of share they are holding. So as per voting rights, shares are classified into:
Most people invest in common stocks only, as it gives the ownership of the company to its shareholder in proportion to the share held by him. Shareholders will get benefited in proportion to the profit made by the firm. Similarly, if a company closes all its operations then shareholders will get a proportionate part of the assets of the company. But this can be risky if the company goes defaults or is left with no assets behind.
Preferred stocks are generally somewhat like a mixture of stocks and fixed instruments like bonds, which is why these are sometimes called Hybrid stocks as well. Preferred stocks give some differential rights to their stockholders over the common stockholders. But, these shares also have one disadvantage over the common stockholder and that is no voting rights given to them while common stockholders have equal voting rights in each meeting of the company in the proportion to the share held by them.
Preferred stockholders are liable to receive regular dividends from the company and also they have priorities in case of repayment. That means if a company defaults or closes its operation, preferred stockholders will be paid first and common stockholders’ turn comes later in repayment of dues against shares they are holding.
Stocks based on the origin of the company
Other types of stocks are categorized based on the origin of the company and where its official headquarters is stationed. The origin of the company does not necessarily restrict the operational part of the company geographically. A company can have its headquarter in its original nation while it can operate in other countries as well.
From the perspective of the Indian stock market, the stocks of the companies that have their origin in India or are registered in India are categorized under domestic stocks. Reliance Industries and Tata are the greatest examples of domestic stocks.
From the perspective of the Indian stock market, the stocks of the companies that have their origin outside India or are registered outside India are categorized under foreign stocks. Microsoft and Google are the greatest examples of foreign stocks. You being an investor can easily invest in these foreign stocks through the same trading platforms which you are using for investment in domestic stocks.
Stocks based on interim payouts
Types of stocks are also done sometimes on the basis of interim payouts by the companies to their investors. Some companies regularly provide payouts to their shareholders in proportion to the share held by them. This payout is termed a Dividend and a Dividend is nothing but a portion of the profit shared by the company among its shareholders. Accordingly, stocks are categorized as Dividend stocks and Non-dividend stocks.
These types of stocks belong to companies that are regularly paying dividends to their shareholders. Generally, a company pays dividends to attract more investors but a large dividend payout is sometimes seen as negative. Because market sentiments say that if a company is paying large dividends it means the company has very less scope for future growth and that’s why not retaining a profit.
These stocks are of those companies which have no history of dividend payouts. It is not like the company does not want investors anymore, but the company retains the profit with it so that the same profit can be used for future expansion of the company. So, if the company is using the profit for expansion means, the company has a high potential for growth and it can generate large wealth as compared to dividends for its investors in the long run.
Stocks based on types of investment
Stocks are categorized based on the strategies of investment made by the companies as growth stocks and value stocks. Growth stocks are the companies having great future potential for growth while value stocks are those which are trading low as compared to their historical price and peers.
These types of stocks have a large potential for expansion and hence can outperform the market in the future thereby can generate tremendous returns for their investors. Since the returns generated can be higher in growth stocks hence risks associated with these stocks are also comparatively high. These types of stocks are usually connected with the current high-demanding products and services and are aimed at long-term utilities of the same demand in the market.
Value stocks are seen as having great fundamentals and usually pertain to well-established companies. Since companies with a good fundamental base have enough maturity and exposure in the operating market, their returns are expected to be superior over the long term. Value stocks are those which are presently trading at short prices or which are cheap as compared to their peers or own historical prices. Since stocks are inexpensive currently but have a strong foundation with the upper hand in market operations, it is highly expected that value stocks will generate good returns for their investors in the long term.
Stocks based on Demand
Demand and supply is the main driving force behind the mechanism of any market. If there is demand for any product in the market, surely there will be a seller as well to furnish that demand. But this cycle of demand and supply is not constant and ups and downs are part of this system. Sometimes demands may be more while other times demand may be less as compared to supply which leads to cycles of inflation, recession, etc. Stocks are categorized based on the demand cycle as cyclical and Non-cyclical stocks.
These types of stocks are those which have a larger impact on such ups and downs in the demand and supply pattern. Cyclical stocks are the stocks of such companies which are engaged in the production and services that depend heavily on demand mechanisms. Tourism, manufacturing, luxury goods industries, etc. are some examples of cyclical stocks. The event of a recession or outbreak of any pandemic can severely affect the operations and profit of these sectors.
The recent COVID outbreak was the classical example of this when the tourism and Hospitality industry was almost shut for more than one year. Such cyclical stocks gain momentum once there is again demand generated in the market thereby giving quick and superior returns to their investors.
Non-Cyclical stocks are sometimes also known as defensive stocks because they don’t have big trend reversals of demands like cyclical stocks. Non-cyclical stocks generally remain constant in downtrend or bear markets and generate good returns in bull markets. The food or grocery industry is the best example of Non-cyclical stocks as their demand always remains whether the market is bear or bull.
Stocks based on returns or volatility
The market has both bull and bear phase and accordingly stocks price moves in both directions. But you would have noticed that some stocks are like evergreen stocks or less volatile and those have minimal or no impact on bearish movement or downtrend of the market. They keep on performing well, although in the bearish phase their prices may be decreased but then also remain positive when all other stocks are moving negative.
On the other hand, there are some stocks that are highly volatile and react to the market movement sharply. They are the ones getting affected by the market movements and sometimes even get collapsed because of long-sustained negative movements in the market. So depending on the volatility, stocks are categorized as Blue-chip stocks and Penny stocks.
Blue Chip stocks
Blue Chip stocks can be termed the cream of all the stock market in terms of volatility and returns generated for its investors. These stocks represent those companies that are true leaders in their segments and hence have a great reputation in the market. So, we can assume that such industries are well-established and mature enough. Since blue-chip stocks are established firms, this means they are not the ones generating the highest returns for investors. But surely they generate sustained returns even in the bearish market which means they are comparatively safe to invest for a risk-avoiding investor.
Penny stocks are those companies that have limited or minimum liquidity for sustainable operation and operate with fewer margins. Usually, penny stocks are those which are very cheap with low fundamentals and generally trade at a price of fewer than 10 Rs per share. Since penny stocks have less liquidity, hence in times of bearish movement, penny stocks can collapse and default.
Hence penny stocks can eat the entire amount of investors if there is no success in the business of such stocks. But if a company gets successful in its operation, its share price shoots overnight and can top the market return manifold. Some penny stocks have generated more than 1000% returns within a span of months. Penny stocks are highly risky to invest in, so you must be aware of them before investing.
The share market is an ocean of money where you can generate enormous wealth provided you have each detail of investing and trading with you. Stocks in the market are of different categories with associated risks and return capability but the same stocks can generate wealth for one investor while the same stocks can give loss to other investors. Hence you must read the fundamentals of the stock before investment and always keep your risk appetite capacity in mind.