The Different Types of Stocks Available for Investors

Based on Stock Class

This is the most basic factor used for classification of stocks. This is basically done based on the voting right of shareholders. Not every stock provides the shareholder with a voting right. A voting right empowers the investor to cast their vote in important management decisions. Shares can be of two types, the ones which allows the investor to cast their vote and the ones which don’t.

Based on Market Capitalization

Market capitalization or the total shareholding of the company is usually calculated by multiplying the number of company’s outstanding shares with the current market price of one share. Stocks can be classified into three categories based on market capitalization of the company:

• Large Cap Stocks – These are the stocks of companies with a huge market capitalization. These companies are usually well established and are financially very sound with plenty of cashflow. Such stocks allow the investor to preserve capital over long term horizons and also enjoy the benefit of dividends.
• Mid Cap Stocks – The stocks of companies with a medium market capitalization i.e., between 350 Crores to 4000 Crores are known as mid cap stocks. These are renowned companies which have demonstrated steady growth in their past and are still growing rapidly. These companies are considered to be a seasoned player and usually perform well in long term.
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• Small Cap Stocks – Stocks of companies with a market capitalization of less than 250 Crores are known as small cap stocks. Such companies have potential to perform well and demonstrate growth in the future. Such stocks often attract investors because they are available at cheap prices. These companies are relatively new and there is usually no prediction about their future performance. Therefore, these stocks are risky but have the highest potential for growth amongst the three.

Based on Ownership

Stocks can be further classified into three categories based on ownership. All these categories have differences with respect to growth and voting rights for the investor.

• Preferred and Common Stocks – Preferred stocks are accompanied by a fixed dividend payout every year and the prices of these stocks are also less volatile when compared with common stocks. However, when the company is in profit and accumulates surplus funds, common stockholders are the ones who are going to be benefited from the same. Similarly preferred stockholders do not have a voting right in the company, a privilege with common stockholders enjoy.
• Hybrid Stocks – Investors are offered preferred stocks by some companies with an option to convert them into common stocks at a certain time. Such stocks are known as hybrid stocks. Depending on the current nature of stock, the stockholder may have a voting right in the company. Such shares are also known as convertible preferred shares.
• Stocks with Embedded Derivatives Option – These types of stocks are very rare and have an embedded derivative option. These means that these stocks can be “call” or “put”. In case of a Call stock, the company has an option to buy it back for a price at certain time. In case of a put stock, the stockholder can sell it back to the company at certain time.

Based on Dividend Payouts

Stocks can be further classified into three categories based on ownership. All these categories have differences with respect to growth and voting rights for the investor.

• Growth Stocks – As the name suggests, growth stocks are more focused on growth rather than dividend. The companies reinvest the profits for enabling them to grow at a rapid pace. The dividend payouts in such companies are low. However, since the rate of growth of the company is high, the stock prices also grow very fast. Such stocks are recommended for investors who plan to invest for long term and don’t want an immediate income.
• Income Stocks – These stocks have a higher dividend payout when compared to growth stocks, therefore the name. Income stocks indicate that the company is financially stable. However, the growth rate of such companies may not be very high. Preferred stocks also fall under the category of income stocks. Such stocks are good for investors with a low risk profile who want an immediate income. The income from dividend is also exempted from tax.

Based on Fundamentals

Stocks can be classified into two categories based on company fundamentals. Fundamentals like profits, earning per share etc. are used to compare the stock prices to reach at the intrinsic value of share. These include:

• Overvalues Shares – The stock whose price is higher that the intrinsic value is considered to be overvalued stock.
• Undervalued Shares – The price of such stocks is usually lower than the intrinsic value. This is a preferred category amongst investors because there are high chances that the price of an undervalued share would rise in the future.