Stocks are the most profitable forms of investment if you know how to handle the risk that comes with the stock market. There are various types of stocks to invest in in the market, but not every type can be suited to your needs.
The stock market is centralised and is a broad platform used by shareholders and investors for the stock exchange between public and private markets. Before investing in the stock market, you should get a brief idea about every type of stock and how it can be used in a fruitful way.
What are the Different Types of Stocks?
Stocks can be divided into six different categories based on various features.
Stocks to Invest in Based on Ownership
Based on the ownership, stocks are further divided into four categories:
- Common Stock: Investors with common stocks in the company can earn from the company’s profit and have the voting rights to elect the board of directors. The price of the common stock is more volatile as they have the potential to earn their investors dividends that are not fixed. It is a risky investment but can give higher returns in the long term than the returns from other types of stock.
- Preferred Stock: Preferred stock also offers its investor ownership in the company but does not give voting rights. If the company closes down then preferred stocks are given preference over common stocks. Investors of preferred stocks get higher and fixed payments as dividends every year.
- Hybrid Stocks: By combining features of common and preferred stocks, you get the hybrid stock. Companies also offer preferred shares that can be turned into common shares after a fixed time. These are called convertible preference shares.
- Embedded Derivatives: Companies offer shares with embedded derivative options called callable and putable. Companies can buy back their shares at a certain time and price with the callable option. While with putable stocks, the shareholder can sell the shares back to the company at a certain time and price.
Stocks to Invest in Based on Market Capitalisation
Market capitalisation is the main feature of the stock market. You can divide the stocks to invest in the market based on their size. They can be divided as
- Large-Cap: The top 100 multinational or established companies come under the large-cap. These companies are stable in performance and offer higher dividends to their shareholders. They can handle tough market conditions as they are financially strong. This provides safer and more stable investments than mid-cap and small-cap stocks.
- Mid-Cap: Companies listed between 101 and 250 on the list offer mid-cap stocks. These companies are well-recognised and have constant growth. They are less predictable as they are often more sensitive to industry and economic trends.
- Small-Cap: All the other companies are considered small-cap. Some companies have higher growth potential, while others have unpredictable performances. Stocks from these companies mostly have a low price, which is the best way to get a profit when you are just starting in your trading career.
Stocks to Invest in Based on Fundamentals
Some investors believe in assessing the company’s finances before investing in their stocks. Investors compare the share price with the company’s value. There are two types of stocks based on fundamentals:
- Overvalued Stocks: These are stocks with a higher price, but the companies’ earning potential or intrinsic value is less.
- Undervalued Stocks: These stocks have a low price, but the company’s intrinsic value is high.
Stocks to Invest in Based on Risk
Some investors go for high risk to get great returns, while some go for lower returns by investing in low-risk stocks. Based on the risk that comes with the stocks, they can be divided into
- Beta Stocks: Investors analyse the risk associated with stocks by using statistical measures called beta. This helps to find the price fluctuations of the stocks to invest in. A stock with a higher beta comes with a higher risk of investment.
- Blue-Chip Stocks: If the company has a stable income, low liabilities, and pays dividends regularly, its stocks are called blue-chip stocks. These are the safest stocks.
Stocks to Invest in Based on Profit Sharing
When you buy a share in the company, you can get a share of the profits based on your investment. Companies share the profits in the form of dividends. A company can either directly share the dividends or invest the shared profit to grow its business. There are two types of stocks based on how the company shares the profit.
- Income Stocks: Like preferred stocks, income stocks provide stable and higher dividend payouts. Companies with strong finances that can share regular profits every year offer income stocks. Due to their regular profit distribution, these companies have steady growth and are seen as low-risk investments.
- Growth Stocks: Some companies reinvest their profits for the growth of the business instead of paying dividends to the shareholders. The price of the growth stocks quickly rises because of the company’s fast growth. Shareholders can earn higher returns in the long term by selling growth stocks.
Stocks to Invest in Based on Price Trends
Stock prices fluctuate in the stock market due to seasonal and economic trends. So, based on price trends, stocks are divided into
- Cyclical Stocks: The prices of these stocks fluctuate a lot as they react in sync with economic trends. If the economic conditions are positive and booming rapidly then cyclical stocks have massive growth and vice versa.
- Defensive Stocks: These types of stocks are not affected by poor economic trends. For example, stocks in FMCG companies, medicine, insurance, food, etc., are considered defensive stocks.
Different types of stocks to invest in in the market can give you higher returns with low risk, high risk, or minimal risks. You can invest in any of them based on your preference. Just do basic research and analyse the stock market to get the best out of your investment.
If you need professional help in investing your valuable money, you can consult the experts at Piramal Finance. Visit their website or give them a call to learn more about their financial products and services.