1. Classification based on stock classes
This is one of the primary factors used to classify stocks and is based on the voting rights of the shareholders. There are some stocks that do not give the shareholders the power to vote at the annual meetings where the decisions regarding the management of the company and such issues take place. Unlike these stocks, there are some other stocks that allow shareholders to participate in the decision making in the company matters, by casting their votes. Another kind of stocks offer shareholders the opportunity to cast multiple votes in matters pertaining to different aspects of the company.
2. Classification based on market capitalization
Stocks can be classified on the basis of the market capitalization of the company, which is the total shareholding of a company. This is calculated by multiplying the current price of the company stock with the total number of shares outstanding in the market. Listed below are the types of stocks based on market capitalization.
i. Large Cap Stocks
These are often stocks of Blue-chip companies which are established enterprises with large reserves of cash at their disposal. It is interesting to note that the larger size of the large cap companies does not mean that they grow more rapidly. In fact it is the small stock companies that tend to outperform them over the longer time frame. But large cap stocks do come with the benefit of allowing the investors to reap higher dividends in comparison to the smaller and mid cap companies stocks, ensuring that the capital is preserved over the long term period.
ii. Mid Cap Stocks
These are the stocks of medium sized companies that have a market capitalization of INR 250 Crore to about INR 4000 crore. These companies have a well recognize name in the market which brings along the benefit of potential for growth, as well as the stability that is usually accompanied with being a seasoned player in the market. Mid cap companies have a good track record of steady growth and are very similar to blue chip stocks barring their size. In the long term these stocks do and grow well.
iii. Small Cap Stocks
As is suggestive of the name, small cap stocks have the smallest value in the market as compared to its counterparts. These are small sized companies that have a market capitalization of upto INR 250 and have the potential to grow at a good pace in the future. Investors who are willing to commit to a long term and are not very particular about the current dividends, and are willing to stand their ground during price volatility, can make significant gains in the future. As an investor you can buy these stocks when they are available at a cheap price during the initial stage of the company. There is no surety about the how the company will perform in the market since they are relatively new. Because these small cap companies are new they are highly volatile and their growth impacts the value and revenue of the company to a huge extent.
3. Classification based on ownership
Based on wondership, there are three types of stocks that investors can own which offer them different rights and growth potential.
i. Preferred & common stocks
Preferred stocks offer investors a fixed amount of dividend every year unlike common stocks. The price of preferred stocks is not as volatile as a common stock but it is common stock that gets the benefit of priority when the company has surplus money to distribute. At the time of company liquidation, it is the company’s creditors, its bond holders, debenture holders who get priority over the preferred shareholders. Common stockholders have voting rights, a privilege preferred shareholders do not enjoy.
ii. Hybrid Stocks
There are companies that offer preferred shares with the option of converting them to common shares, with conditions, at a certain point in time. These are known as hybrid stocks or convertible preferred shares and may or may not have voting rights.
iii. Stocks with embedded derivative options
Stocks that come with the embedded derivative option means that they can be ‘callable’ or ‘putable’ and are not as commonly available. A ‘callable’ stock has the option of being bought back by the company for a certain price at a certain point in time. Similarly, a ‘putable’ stock offers its holder to sell it to the company at a certain price and time.
4. Classification based on dividend payment
i. Growth Stocks
These stocks do not pay high dividends as the company prefers to reinvest the earnings to enable it to grow faster, hence, the name growth stocks. The value of the shares of the company rise with the fast growth rate which in turn allows investors to profit through higher returns. It is best suited for those investors who seek long term growth potential and not an immediate second source of income. Growth stocks carry higher risk than their counterpart.
ii. Income Stocks
In comparison to growth stocks, income stocks hand out a higher dividend in relation to the price of the share. Higher dividends translates to higher income, hence, the name Income Stocks. Income stocks are indicative of a stable company that can afford consistent dividends but these are also companies that do not promise very high growth. This means that the stocks price of such companies may not rise much. Income stocks also includes preferred stocks. IT is a good investment for those investors who seek a secondary source of income through relatively low risk stocks. The dividend income in income stocks is not taxed and thus is great for investors of low risk profile who want long term investment.
You may want to use the dividend yield measure to find such stocks that offer high dividends. Dividend yield is a measure of your earning as an investors (earning per share) from your investment, by means of the total dividends earned. This figure can be derived by dividing the dividend by the share price that was announced. It is then written in the form of a percentage. For instance, if the stock price is INR 100 and it offers a dividend of INR 5 per share, its yield will be 5 percent.
5. Classification based on fundamentals
Investors who believe that a share price must equal the intrinsic value of the company’s share, the value investing investors, compare the share prices with components like per share earnings, profits, etc to reach at an intrinsic value per share.
i. Overvalued Shares
These are shares with prices that exceed the intrinsic value and are considered overvalued.
ii. Undervalued Shares
These types of shares are popular amongst the value investors as they believe that the price of the share would rise in the future.
6. Classification based on Risk
The risk level of stocks differ depending on the share price fluctuations. Stocks with higher risk reward the investor with higher returns, while low risk stocks generate low returns.
i. Beta Stocks
The beta or the measure of risk is derived by calculating the price volatility of the stock. Beta can be positive or negative which denotes whether it moves in sync with the market or against it. The higher the beta, higher is the risk quotient of the stock. If the beta value is more than 1 it means that the stock is more volatile than the market. A lot of investors with knowledge of this measure use it to make their investment decisions.
ii. Blue Chip Stocks
Blue chip stocks are stocks of those companies that have lower liabilities and stable earnings and which pay regular dividends. These very large and well-recognised companies that have a long history of sound financial performance are a good bet for Investors who seek safer avenues of investment.
7. Classification based on price trends
This classification is based on the movement of stock prices in tandem with or against the company earnings.
i. Defensive Stocks
These are stocks that are somewhat unfazed by economic conditions and are preferred when the market conditions are poor. Food and beverage companies are a common example.
ii. Cyclical Stocks
Stocks of companies that are greatly affected by economic conditions and see high price fluctuations with market changes are cyclical stocks. These types of stocks grow rapidly during the boom cycle but the growth is slowed down in the slow economy. Automobile stocks fall in this category.