What Are the Different Types of Stocks

Types of Stocks in the Indian Stock Market

Purchasing stocks is considered as a great way to invest your money today in India since there are many benefits of investing in the share market. When you invest in a company’s shares, you become part-owner of that company, letting you shape your financial future and grow your capital. However, the share market is a complex entity, which is why there exist several types of stocks. You probably must have heard of terms like common stocks and preferred stock; if yes do you know which one is better? 

So, let’s delve into the different types of equity shares available in the Indian stock market. With that, you will equip yourself with the knowledge and understanding necessary to make informed investment decisions tailored to your aspirations and risk appetite.

What are the Different Types of Stock?

In India, there are several types of stocks you will come across as investors. So, to give you a gist of the main types of stocks and their subcategories, we have compiled a table below. 

Based on Ownership

When we say "based on ownership," we're referring to the different types of shares based on the rights and benefits they grant upon their owners—or shareholders.

Common Stocks: Let's start with common stocks, which give you a stake in a corporation. Holding common stock gives you voting rights as well as the possibility of receiving dividends. Keep in mind, however, that common stockholders beat the highest risk in the instance of a liquidation or bankruptcy—they are last in the chain to receive liquidation proceeds. 

Preferred Stocks:  Preferred stocks, on the other hand, give you preferential treatment  when it comes to dividend payments. With set dividend rates, preferred stockholders receive dividends and liquidation proceeds before common stockholders. That said, preferred stocks do not often come with voting rights.

Hybrid Stocks: Consider hybrid stocks for a well-balanced blend of income and ownership perks. These shares combine the characteristics of both common and preferred stocks, i.e., they offer you a special chance to invest in shares that may include a fixed dividend rate payout and limited voting rights.

Based on Market Capitalization

When we categorize stocks based on market capitalization, or market cap, we sort them based on the cumulative value of their outstanding shares. 

Large-cap: Within the realm of market capitalization, we encounter large-cap stocks: market capitalization over Rs. 20,000 crores. These shares belong to well-established companies with substantial market value.

Mid-cap: As we venture further, we encounter mid-cap stocks: market capitalization between Rs. 5000 crore to Rs. 20000 crore. These stocks represent companies with a moderate market capitalization that provide a good balance of growth potential and risk. 

Small-cap: Finally, we reach small-cap stocks, which belong to companies with relatively small market capitalization that is less than Rs. 5,000 crores. These stocks promise higher levels of potential growth but come with higher volatility. 

Based on Risk

Technically, we could easily distinguish stocks based on risk by looking at their market cap. However, another way to differentiate stocks based on risks is by classifying them as blue chips stocks and beta stocks. 

Blue Chip Stocks: Market stalwarts or—blue chip stocks—are the shares of major, financially sound corporations with a considerable market presence. Blue chip stocks are appealing to conservative investors due to their dependability, consistent performance, and ability—at least to a higher extent—to endure market downturns.

Beta Stocks: Beta stocks are at the other side of the risk spectrum as they are more volatile; however, at the same time, they are frequently associated with companies in emerging industries experiencing rapid expansion. Thus, investing in beta stocks demands a higher risk tolerance, but it also opens up the possibility of big rewards.

Based on Location

Another way to categorize stocks is based on the geographical location, or the place the stock of the underlying company is listed. 

Domestic Stocks: Invest in native, domestic stocks to stay rooted in the local market—the Indian stock market. These equity shares are owned by corporations registered and operating in India. Domestic economic conditions, government regulations, and the particular dynamics of the Indian market all have an impact on domestic equities; that said, it must not be misconstrued that global events don’t affect these stocks. 

Foreign Stocks: Alternatively, foreign stocks are shares of corporations that are listed on overseas exchanges, such as the NYSE (New York Stock Exchange), NASDAQ, or the Tokyo Stock Exchange. Some stock names (not recommendations) include stocks like Apple, Alphabet (Google), Toyota, TSMC, etc. 

Based on Dividend Payment

Next, we look at how stocks are classified based on the dividend payments to their existing shareholders. 

Income Stocks: Income or dividend stocks belong to corporations that generate consistent cash flows and pay out a sizable amount of their profits in dividends. Investors wanting stable income can consider income stocks.

Growth Stocks: For those focused on long-term capital appreciation, growth stocks provide an avenue for potential exponential growth. These shares belong to companies that reinvest profits into expanding their operations and driving future growth. While growth stocks may not offer substantial dividends in the short term, their potential for capital appreciation makes them appealing to investors with a long-term investment horizon.

Based on Price Trends

Lastly, we categorize stocks based on the price trends they exhibit over a large time frame. 

Cyclical Stocks: These stocks belong to industries like automobiles, construction, and consumer discretionary, where demand varies depending on broader economic conditions. So, these stocks perform well when the economic conditions are great, and perform poorly during economic downturns. 

Defensive Stocks: These stocks belong to industries such as utilities, healthcare, and consumer staples, and provide necessary products or services regardless of the economic circumstances. Therefore, defensive stocks are not immensely impacted by economic events. So, investors seek sanctuary in defensive stocks during market turmoil.

Conclusion

You have received a great understanding of the many investment opportunities available to you by exploring the various types based on ownership, market capitalization, risk, geography, dividend payout, and price movements. Remember that investing in the stock market entails inherent risks, and it is critical to undertake complete research, analyze market conditions, and seek professional guidance before making any investment decisions. Tailor your investment strategy to align with your financial goals, risk tolerance, and investment horizon.