A Stock is the ownership of the investor in the company. Stocks are one of the most high-paying yet equally risky investments. Stock markets are an important indicator of the economy of a country. There are various ways an investor can participate in the market. It can be done using various types of stocks available in the markets.
A demat account helps the investor to trade in different stocks listed on the stock exchange.
Types of stocks and their Classification based on different factors
A fair understanding of stocks is required before you start investing. It gives you an edge in the market as you are proactive about the advantages and disadvantages of these stocks. Know more about demat accounts vs trading accounts before you start investing in different types of stocks.
Let us understand the types of stocks based on various factors and what they mean.
Classification based on ownership
As already discussed, a stock is ownership in the company. Different shareholders have divergent rights on these shares. These shares are treated depending on their rights.
- Common stock
These are the most basic stocks and do not have any preferential treatment. The stocks do not have a redemption date associated with them and no dividends are available on these stocks. These stocks have mostly been opted till perpetuity by investors.
- Preferred stock
These stocks have preferential rights in some circumstances. This type of stock pay dividends at regular intervals. If the company goes into liquidation, the preferred stock will always have more rights over the assets of the company as compared to common stock.
Classification based on Market Capitalisation
- Large-cap stocks
These are stocks of companies with high market capitalisation. These are also called blue-chip companies. These have a proven record and can sustain market waves easily.
- Mid-cap stocks
These are growing companies and have high volatility as compared to large-cap stocks. These companies are popular on regional levels.
- Small cap stocks
These stocks have the highest volatility and are yet to prove their presence in the market. They have increased risks associated with them.
Classification based on risk
- Growth stocks
These are stocks of companies that are in their early life cycle. These companies are looking for expansion shortly. These companies do not necessarily provide a dividend. But, they have high growth and retain their earnings.
- Value stocks
These stocks show slow growth and are normally undervalued. The earning and growth potential for such stocks is more than what reflects in their stock price.
Classification based on business cycles
- Cyclical stocks
These stocks move with the markets and rise when the markets are bullish, and fall when the markets are bearish. Companies whose stocks are cyclical in nature deal in non-essential goods.
- Non-cyclical stocks
These are stocks that are unaffected by market movements. They continue to grow and increase in value even with bearish trends. The companies of these stocks deal in essential and addictive substances.
Classification based on location
- Domestic stocks
These are stocks of local companies listed on exchanges in respective countries. One can easily invest in them using the demat account.
- International stocks
These are stocks from international companies. International brokers generally trade in these stocks, which are not listed on local exchanges.
How to pick the right stock?
Selecting the right stock is a cumbersome process. The stock market has a vast number of options available. Some tips to select the right stock are:
- Understand the business of the company
Do not just invest in the stock because of the hype and fear of missing out. Do thorough research on what the company does and why to invest in its stocks.
- Financial Ratio analysis
Financial ratios are the primary indicators of the financial position of any company. Always take a look at the balance sheet and profit and loss statement of the company to be doubly sure.
- Risk analysis
Always perform a risk analysis no matter how strong the stock is for a company. Stocks always have risks associated with them. Market risk is measured by beta and you can track the beta for a particular stock for analysis.
- Diversify your portfolio
Always keep your portfolio diversified. This reduces the risk to a certain extent and can provide returns from different stocks at different times.
Classification of stocks makes it easier for the investor to choose from thousands of stocks listed on the exchanges. Investors can choose stocks according to their investment plans. Funds can be allocated by judging the risk of each stock to the investors. The division into various categories makes it easier to pick a stock and research the same.