Different Types of Stocks in the Stock Market

What are the Different Types of Stocks?

Explore the different types of stocks in India. Learn about large-cap, mid-cap, small-cap, common, preferred, income, and growth stocks. Find the best types of shares to invest in based on your goals.

Like every other market, stock market is a place where stocks are traded. For a long time now, stock market has been bringing businesses, investors, traders and other entities together. As an investor, among other things, you should know about the categorization of stocks to determine which stock type suits your investment goals. Here we are to let you know the classification of stocks on different parameters.

We know that stock is a type of security that represents the ownership of a fraction of a company. Stocks are classified into different categories based on the various parameters associated with the company and their performance in the stock market.

Types of stocks

Stocks are classified into different types on various parameters like ownership, market capitalization, risk, sectors, location among others. Below is a representation of types of stocks based on the respective parameters.

Let us look into each type of stock in detail

1. Types of Stocks Based on Market Capitalisation

Market capitalisation, or “market cap,” is a way to classify stocks by the total value of a company’s outstanding shares. Here’s a clearer look at the different types:

Large-cap Stocks	These are the biggest 100 companies by market value. They are well-established, often with stable revenue and profit. This makes them less risky. Shares are generally more expensive because of their size and reputation.
Mid-cap Stocks	These are medium-sized companies by market value, ranked 101-250. They often grow faster than large-cap companies, offering higher returns. They are more affected by economic changes and industry trends, making them somewhat less predictable.
Small-cap Stocks	These are smaller, less valuable companies. Prices can fluctuate significantly due to their size and lower liquidity. They can offer substantial gains but come with higher risk.

2. Types of Stocks Based on Ownership

Stocks can be classified based on their rights and privileges, which dictate the level of influence and benefits that shareholders receive. This classification impacts factors such as dividend payments, voting rights, and the priority of claims in case the company faces liquidation.

Common Stock	Shareholders can receive a share of the company’s profits through dividends. These are the most common types of stock. Typically, common stockholders have voting rights in company decisions.
Preferred Stock	Preferred stockholders receive fixed dividends before common stockholders. In case of liquidation, preferred stockholders get paid before common stockholders. Usually, preferred stockholders do not have voting rights.
Hybrid Stocks	These stocks have characteristics of both common and preferred stocks. This type allows investors to convert bonds into equity or debt.
Convertible Preference Shares	Issued as preference shares that can be converted into a set number of common shares at a specific time. The company may choose to grant optional voting rights.
Stocks with Embedded Derivative Options	The company can buy back its stocks at a predetermined price or time. Investors can sell their stocks back to the company at a specific price or time. These options are not commonly issued.

3. Types of Stocks Based on Fundamentals

Investors often evaluate a company’s financial health before purchasing its stock, despite the fact that market prices are influenced by supply and demand.

Overvalued Stocks	These stocks are priced higher than their intrinsic value. The current market price is not justified by the company’s earnings outlook.
Undervalued Stocks	These stocks are priced lower than their intrinsic value. These stocks have the potential for price increase as they reflect strong fundamentals not yet recognised by the market.

4. Types of Stocks Based on Price Volatility

Stocks can be classified based on how much their prices fluctuate. Understanding this can help investors choose stocks that match their risk tolerance.

Beta Stocks

The beta coefficient is a statistical measure used to assess how much a stock’s price moves in relation to the market.
If a stock has a high beta, it means the stock is more volatile. For example, if the market goes up or down by 1%, a high beta stock might go up or down by 2% or more. This implies higher risk but also the potential for higher returns.

Blue-chip Stocks

These are stocks of large, well-established, and financially sound companies that have been operating for many years. Examples include companies like Reliance Industries and Infosys.
Blue-chip stocks are known for their stable performance and consistent returns over the long term. They tend to be less volatile compared to beta stocks, making them a safer investment option for those who prefer steady growth and lower risk.

5. Types of Stocks Based on Economic Trends

Stocks respond differently to changes in the economy. They can be categorised based on their reaction to economic trends.

Cyclical Stocks	These stocks are highly sensitive to economic changes. When the economy is doing well, their prices tend to rise significantly. Conversely, during economic downturns, their prices can drop sharply.
Defensive Stocks	Defensive stocks are less affected by economic changes. Their prices tend to remain stable regardless of whether the economy is booming or in a recession. Considered safer investments due to their stability during economic fluctuations.

There are various other parameters like sectors, fundamentals, etc. based on which the stocks are classified. Classification of stocks on different parameters helps you determine the nature of stocks which in turn helps make a better decision. Now that you know the classification of stocks, you can choose the stocks that suit your investment needs. Also, you can refer to types of orders to know the various orders you can place to buy/sell stocks of your choice.

How to Buy Stocks?

Various criteria, such as company size, dividend payment, industry, risk, volatility, and fundamentals, can be used to categorise stocks. The following details the methods for buying equities based on these classifications:

Create the necessary accounts: Before you begin stock trading, you must first create a demat and trading account. Without these accounts, participation in stock markets is not possible.
Conduct Stock Analysis: Analyse stocks based on various parameters such as company size, dividend payments, industry, risk, volatility, and fundamentals. Tailor your choices to fit your investment profile.
Monitor Selected Stocks: After selecting potential stocks, monitor them for a period to ensure informed buying decisions. Understanding stock price movements is crucial during this phase.
Determine Order Placement Timing: Choose whether to place your order during market hours or after markets close. Consider the target share price and preferred buying conditions.
Choose Order Type: Order options encompass limit orders, market orders, and stop-loss orders. Each order type serves a specific purpose, providing flexibility in executing transactions.
Execute Order through Trading Account: Once order specifics are determined, execute the trade through your online trading account or by contacting your broker. Provide necessary bank account details for the seamless processing of purchase funds.
Verify order Execution: Confirm that your order was properly performed and that the purchase amounts were deducted from your bank account. This completes the process of purchasing stocks and creates your ownership of the chosen assets.

Conclusion

Understanding the different types of stocks in India, including large-cap, mid-cap, small-cap, common, preferred, income, and growth stocks, is crucial for making informed investment decisions. Whether you seek stability with blue-chip stocks, higher returns with growth stocks, or steady income with dividend-paying stocks, knowing these categories will enhance your investment strategy and help you navigate the stock market more effectively. Happy investing!

FAQs

How are stocks categorised?

Stocks are categorised by various parameters, such as market capitalisation (large-cap, mid-cap, small-cap), ownership rights (common, preferred, hybrid stocks), financial health (overvalued, undervalued), price volatility (beta, blue-chip stocks), and reaction to economic trends (cyclical, defensive stocks). This helps investors choose stocks that align with their investment goals.

What are income stocks and growth stocks?

Income stocks pay consistent dividends, provide steady income, and belong to financially stable companies, making them low-risk investments. Growth stocks do not pay dividends but reinvest profits to expand the business, offering high growth potential and higher risk due to market price fluctuations.

What are common stocks and preferred stocks?

Common stocks are the most common type of stock because they give shareholders dividends and voting rights. Preferred stocks offer fixed dividends and priority in liquidation but usually do not provide voting rights.