A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation.
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What is a Stock?
A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Stock units are called shares, which entitle the owner to a proportion of the corporation’s assets and profits equal to how much stock they own.
Difference between stock and share ?
- ‘Stocks’ are generally a form of financial assets that represents a portion of ownership of a companies – for example, you could say that you own stock in “Reliance Industries” and “Infosys”.
- ‘Shares’ usually refers to units of ownership in a specific company – for example, you could say that you own ten “Reliance Industry” shares
Types of stocks
Stock selection have a number of factors, including ownership, market size, risk, industries, and profits, are used to categorize stocks into several kinds. An illustration of the various stock types according to the corresponding parameters is shown below.
Ownership
1. Common Stocks– These are the most common types of stocks available. Shareholders receive dividends from company profits after being paid to the preferred stockholders, as it is not fixed the dividend can be high or low or sometimes unavailable to provide. One most powerful roles they have is the voting rights in the company’s decision.
2. Preferred Stocks – These stocks receive a fixed dividend and are given before common stockholders. In liquidation time, they are given the priority first to get paid but they do not have any voting rights.
3. Hybrid Stocks – Have to combine aspects of equity and debt investing. They are a mix of common and preferred stock features. They have the potential for equity involvement through profit-sharing, conversion rights, and other equity-linked features, whenever the company decides.
4. Convertable Preferred Stock – These stocks are initially issued as preferred stock and then converted to common stock at a specific time. The company decides whether to give voting rights on these stocks or not.
Market Capitalization
5. Large Cap Stocks – These are the top 100 businesses based on market capitalization of over $10 billion which have a solid track record of consistent income, profit and stable dividends. Therefore being less dangerous, due to its size and financial strength, shares are typically more costly.
6. Mid Cap Stocks – These are companies ranging between $2 billion and $10 billion on market capitalization of market capitalization . which are ranked 101–250 by market value, are medium-sized. They frequently give more returns and grow more quickly than large-cap firms. They are a little less predictable because they are more impacted by shifts in the economy and business trends.
7. Small Cap Stocks – These are less valuable, smaller businesses. Because of their size and reduced liquidity, prices have large fluctuations. Although they carry a higher risk, they can yield significant high returns.
Economic Trends
8. Cyclic Stocks – These stocks follow the economy’s movements. As a result, these stocks’ prices decline when economic trends are bad and vice versa. So in a booming economy investing in such equities is typically advantageous.
This variation results from the fact that the goods and services these businesses provide are frequently regarded as luxury or non-essential—items that individuals are more inclined to purchase when they have additional money to spend.
9. Defensive Stocks – Changes in the economy have less of an impact on defensive stocks. Regardless matter whether the economy is expanding or experiencing a recession, their costs often stay the same. Some examples of such stocks are food, medicines, insurance, etc. are seen as safer investments.
Fundamentals
10. Over-Valued Stocks – An overvalued asset is an investment that trades for more than its intrinsic value. The current market price is not justified by the company’s earnings outlook. For example, if a company with an intrinsic value of 165 RS per share trades at a market value 200 RS per share, it is considered overvalued.
11. Under-Valued Stocks – In contrast, undervalued stock is an investment that trades for less than its fair value. They provide investors with good upside potential and minimal downside risk by trading at discount pricing.
Dividend Payment / Profit Sharing
12. Growth Stocks – These have the potential to outperform the market trend, and investors also expect to increase their earnings and value; for which they are more sensitive to price change
13. Income Stocks – These stocks have stable and regular income: usually in the form of dividends, over a period of time. They also have low exposer to risk compared to the industry as they are matured and offer sustainable.
Risk / Price Volatility
14. Beta Stocks – “Beta” is a statistical coefficient that measures , how much a stock’s price moves in relation to the market.
Beta stocks are highly volatile securities which have a high degree of responsiveness of all market fluctuations.
If a stock has a high beta, it means the stock is more volatile. For example, if the market goes up by 2%, a high beta stock might go up by 2% or more and vice versa. This implies higher risk but also the potential for higher returns.
15. Blue Stocks – Refers to large, well reputated with strong financial record companies- that provide steady dividends. They tend to be less risky and is a safer option for investors looking for stable income. They are the top players of their own industries and also falls under large cap stocks.
Conclusion: Which stocks should you pick?
Understanding the different types of stock will help you better becoming a rational investor, which each stock catagory serving a special purpose in your portfolio.
Diversification is very crucial and an effective strategy – a mix of growth and value stock is always an optimal choice, which depends on an investors investment sentiment, risk taking ability and understanding of the market.
In the end, its all about researching enough about the stock that you select and focus on long term fundamental analysis.
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