The stocks can be classified in several ways depending on factors such as voting rights, duration, ownership, and the likes. In this blog, we seek to discuss different categories of stocks that are allowed.
In this article
- Categorization Based On The Class
- Categorization Based On Market Capitalization
- Categorization Based On The Ownership
- Categorization Based On Dividend Payment
- Categorization Based On The Fundamentals
- Categorization Based On The Risk
- Categorization based on price trends
Categorization Based On The Class
Class is one of the primary factors used to categorize stocks. The categorization is based on voting rights for the shareholders.
1.With Voting Rights
These shares provide shareholders the power to vote at the annual meetings regarding the decisions taken by the management of the company. An example of such stock is ordinary fully paid equity share.
2.Without Voting Rights
This category of shares does not provide voting rights to the shareholders. The shareholders can’t vote in favor of or against any decision taken by the management. A preference share is an example of such a share.
There’s another category of shares that provides shareholders with the opportunity to cast numerous votes in different matters of a company
Categorization Based On Market Capitalization
Stocks are also classified based on market capitalization. Market capitalization is the total value of the outstanding share of a company multiplied by the current market price of each share. Following are the category of stocks based on the market capitalization –
These stocks are often termed as bluechip stocks and are the most notable names of the industry. These stocks are of companies that are large, well established with a diversified product and service offering and strong brand recall. These companies typically have a large cash reserve at their disposal. These companies generally pay a dividend to its shareholders.
These are the stocks of companies that are smaller in size in terms of market capitalization but have the potential to grow at a good pace in the future.
These companies may not have a strong brand recall and may have a smaller consumer base and not a very healthy cash-rich balance sheet.
These stocks are volatile and often tend to get affected due to the economic cycle. Having said that, if fundamentally strong, these stocks can outperform generating multiple times returns over the long-term duration.
The stocks of companies that are neither large and nor small. These companies are more significant than small companies and have a relatively established position in the market with a decent customer base. These stocks generally have the market capitalization between Rs 250 crore and Rs 4000 crore.
Categorization Based On The Ownership
Based on ownership, there are different types of stocks an investor can own. These are –
Preferred stocks provide an investor with a fixed amount of dividend every year or as decided by the management and the investor.
The price of these stocks is generally less volatile when compared to common stock. Preference stockholders do not get voting rights in the company’s decisions, whereas common stockholders are given a voting right.
Generally, preference shares are issued to close relatives and known people of the promoters.
At the time of liquidation of a company, preference shareholders get priority after the creditors, bondholders and the likes.
These are stocks where the company provides an option of converting preferred shares to common shares subject to certain conditions and at a certain point in time. These stocks are known as hybrid stocks, given they have the feature of both.
3.Stocks With Derivative Options
These are the stocks that have a derivative option such as ‘callable’ or ‘putable’ embedded in it which is not available otherwise.
A ‘callable’ stock means the stock that has a possibility of being repurchased by the company for a specific price at a particular time. Similarly, a ‘putable’ stock offers its holder to sell it to the company at a specific price and time.
Categorization Based On Dividend Payment
Based on the amount of dividend, the stocks are classified as –
These stocks do not pay dividends as the company prefers to reinvest the earnings to allow the company to grow at a faster rate. The value of the shares of such companies tends to increase rapidly, thereby allowing an investor to make a profit by way of capital gain.
These stocks are best-suited for investors who are looking to invest for a long-term and not an immediate source of income. Also, growth stocks carry a higher degree of risk as compared to their counterparts.
Income stocks are the stocks that pay dividends regularly to the investor, and thus, the price of these stocks may not move as rapidly as growth stocks.
Income stocks generally are indicative of a stable organization that can afford to pay dividends from the surplus income every year.
Preferred stocks can be considered as an income stock. These stocks are suitable for investors who are looking for a secondary source of income through relatively low-risk stocks.
Categorization Based On The Fundamentals
Investors tend to value the stock of a company before investing. By adopting different valuation techniques, investors tend to arrive at an intrinsic value.
After the valuation, the investors compare the intrinsic value with the current market price and base on the comparison, he/she takes a call on the investment.
These are the shares that have a higher current market price against its intrinsic value. For our novice readers, intrinsic value depicts the actual or fair value of the stock depending on the company’s past and future expected performance.
These are the shares that are very popular among investors. These shares generally have a lower current price when compared to its intrinsic value. It is believed that the price of these stocks tends to increase its intrinsic value in the future.
Categorization Based On The Risk
Every stock carries a degree of risk with itself that results in the price fluctuation. Generally, stocks with high-risk reward an investor with high returns and a share with low risk provides lower returns. Following are the two types of stocks based on the risk –
Beta is a measure of risk and is derived by calculating the price volatility of the stock. Beta can be either positive or negative and indicates the degree to which the stock price moves in sync with the market. The higher is the beta; the higher is the risk involved.
Also, if the beta is greater than 1, it says that stock is more volatile than the market. For example, if the market moves 10% up, and if the beta of a stock is 1.2, the stock will jump 12%.
Similarly, if the market goes down, the extent of the decline in the stock price is also higher for high beta stock.
Bluechip stocks are stocks that have lower liabilities, stable earnings, and pay dividends regularly. These companies tend to have lower debts and surplus cash reserves for the dividend payout.
These companies are well established, well-recognized companies that have a track record of sound financial performance.
Categorization based on price trends
The classification is based on the movement of the stock prices in tandem to the company’s earnings –
These stocks are not fazed by economic conditions and are preferred in times when then the market condition is poor. For example, shares of the companies in the Fast Moving Consumer Goods (FMCG) sector as it is a necessity and not a luxury.
These are the stocks that are profoundly affected by the economic cycle and often see high fluctuation in the price with the market. These stocks are traded heavily as investors buy them when the market hits a low and sell at the high point of the same cycle. Automobile, cement, industrial, etc. sector stocks fall in this category.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.