Stock market investments can bring some variation to your financial planning. But before you
dive in, get familiar with the different types of stocks that are on offer. Knowing about the
available options would help you to put together a balanced stock portfolio that brings the
investment growth you are looking for.
Types of stocks
- Common stocks and preferred stocks
When you buy a common stock, you gain ownership of a company, a share of its profits, and
voting rights. Dividend payments, however, are not fixed or guaranteed.
A preferred stock, on the other hand, pays a regular and fixed dividend. Plus, you receive
preferential treatment if the business winds up. Dividends payments will first go out to the
preferred stockholders. Those who hold common stocks will receive only a proportional share of
the assets remaining.
Preferred stocks are stable and bring a regular income. Common stocks are riskier but also
provide more scope for long-term growth.
- Market cap-based stocks
Market capitalisation, or market cap, refers to the total value of a company’s shares. Large-cap
companies are those with the biggest market caps. In India, their shares are valued at above Rs
1,000 crore. The range for midcaps is Rs 500 crore to Rs 1,000 crore, while small-caps stand
below Rs 500 crore.
Large-cap stocks are usually mature and established companies that are safe bets for investors.
Mid-caps and small-caps are riskier propositions but have a greater capacity for growth.
- Sectoral stocks
These stocks are classified based on the industry they are in. Some examples of sectors are
technology, energy, pharmaceuticals, and finance. As stocks within a particular sector tend to
react similarly to market events, experts suggest spreading your investments across different
sectors. So, if one sector experiences a downturn, stocks from the other sectors will minimise
your overall risk.
- Location-based stocks
The geographical location of a company’s official headquarters helps differentiate between
domestic stocks and international ones. However, the business operations and financial figures of
multinationals make it tough to classify their stocks into the domestic or international categories.
- Growth stocks and value stocks
Growth stocks are high-risk, high-return investments. They often represent businesses that are
catering to rising demand and recording high sales and profits. However, growth slowdown and
competition pressure can push these stocks into decline.
Value stocks are associated with mature and stable companies, often industry leaders, with
limited potential for further growth. They are a good choice for conservative investors.
- Dividend and non-dividend stocks
Investors love stocks that pay regular dividends. But non-dividend stocks could also be a good
choice if a price appreciation is expected over time.
- Cyclical and non-cyclical stocks
Cyclical stocks mirror the movements of their national economies. Stocks in the manufacturing
and luxury goods sectors are cyclical stocks. Demand for them falls during a market contraction.
But when the economy rebounds, cyclical stock prices pick up too.
Noncyclical stocks, also called defensive stocks, represent companies that see stable demand
regardless of the economic conditions. Grocery store chains are an example, and their stocks
perform well in bearish markets.
Now that you are aware of the many options available to stock market investors, focus on
creating a well-diversified stock portfolio. Such a portfolio will serve you well under all market
conditions. Also, open an account with a full-service broker like Kotak Securities that provides
multiple trading platforms and comprehensive market research. It could make your stock
investment process more seamless and convenient.