5 Types of Stocks That Every Investor Should Know: There are thousands of stocks publicly listed in the Indian stock market. And researching them one-by-one to pick the one that suits you the best may take weeks. That’s why these stocks are divided into different categories to help investors/traders classify these stocks to help them study better.
Stocks may be categorized based on different factors like their size, industry, location, etc. In this article, we are going to discuss five popular types of stocks that every investor should know.
5 Types of Stocks That Every Investor Should Know
— Based on Company Size (Market Capitalization)
To classify stocks based on their size, we use Market capitalization or market cap.
Market Capitalization refers to the total rupee value of the company’s share. It is calculated by multiplying the total number of shares by its present market share price.
Here, according to the size of the company, companies can be broadly divided into large-cap, mid-cap, and small-cap stocks. In general, the commonly accepted classification of companies based on their market capitalization in the Indian stock market is:
- Market cap Less than 8,500 Cr → Small cap
- Market cap Between 8,500 Cr to 28,000 Cr → Mid Cap
- Market cap Greater than 28,000 Cr → Large-cap
Here are two more types of stocks based on the size that you should know:
- Penny Stocks: Those stocks which trade at a very low market price (less than Rs 10) and have a very low market capitalization (typically under 100 crores) are called penny stocks in the Indian stock market. Penny stocks are the darlings of new investors. The low market price of these stocks makes them quite attractive to beginners.
- Blue-chip stocks: Blue chip companies are large and well-established companies with a history of consistent performance. These companies are financially strong (usually debt-free or very low debts) and are capable to survive in tough market situations. Most of the blue-chip companies are the market leaders in their industry. A few of the common examples of blue-chip companies in India are HDFC Bank, ITC, Asian Paints, Maruti Suzuki, etc.
In addition, the stocks may also be classified as Mega-caps and Micro-caps based on their size. However, they are not frequently used.
— Based on Industry
Stocks are often categorized based on the sector or industry they fall like— Automobile stocks, Energy stocks, Technology stocks, etc. For example — all the companies that are related to automobiles will be considered as automobile stocks. Maruti Suzuki, Tata Motors, Ashok Leyland, Hero Motocorp, etc.
However, sometimes it might be a little difficult to quickly classify companies when their business model lies in two or more industries. For example, ITC Limited is a conglomerate, although it generates more than sixty percent of their revenue from tobacco products.
— Based on the Business Cycle
Based on the business cycles, the stocks can be classified as Cyclicals or Non-cyclical (Defensive) stocks.
- Cyclical Stocks: As the name suggests, cyclical stocks are those that move in the direction of the market. That is when the economy is doing well, the stocks go up and when there is a downturn in the economy, the value of the stock goes down too. Cyclical industries usually may include services like automobile, construction, hotels, travel and tourism, luxury products, etc.
- Non-Cyclical/Defensive stocks: The revenue and cash-flows and share price of non-cyclical companies continue to do well during an economic slow-down or depression as they are industries that produce the basic needs of life that people will continue to consume. Defensive stocks include goods and services in industries that are not affected by market fluctuations such as utilities, food, and medicines. It is basically any good or service that people will buy whether or not the economy is doing well. Moreover, Tobacco, Alcohol producing companies may fall into this category as people continue to consume these products even during a bad economy.
— Based on Investment Style
Based on the buying or investment style, stocks can be classified as growth stocks, value stocks and dividend stocks.
- Growth stocks: We can define a growth stock as a company that is growing at a very fast rate compared to its industry or market index. The share prices of these companies appreciate at a fast pace and the investors are ready to pay high prices for these companies to compensate for the faster growth.
- Value Stocks: The concept of value investing was famously introduced by Benjamin Graham, the mentor of Warren Buffett, back in the 1930s in his famous book ‘The Intelligent Investor’. A value stock has completely different characteristics than the growth stocks. These companies do not have a high growth rate, rather they grow slow. However, these stocks trade at a low (discounted) market price compared to their true/intrinsic value.
- Dividend Stocks: This is the third way to invest apart from the value stocks and growth stocks. An income stock approach is investing in those stocks which pay a high, regular and increasing dividend. The high dividend yield of these stocks mostly generates consistent returns for passive investors.
— Based on Location
Finally, companies can also be classified based on where they are located. If the company is located in the same country as the investors, it is considered domestic stock. Otherwise, it will be regarded as International stocks. A lot of investors invest based on categories like the International market stocks, emerging market stocks, etc to diversify their portfolio.
As discussed in this article, stocks can be classified in different types based on their characteristics. A few of the popular types of stocks that every investor should know are –
- Based on Size: Large caps, Mid caps, and Small caps,
- Based on Industry: Automobile stocks, Pharma Stocks, IT Stocks, etc.
- Based on Business Cycle: Cyclical and Non-cyclical,
- Based on Style: Growth stocks, Value stocks, Income stocks,
- Based on Location: International stock, Emerging markets, etc.
Classifying stocks makes it easier for investors to study the companies based on their preferences. That’s all for this article. Please comment below if you’ve any queries. I’ll be happy to help. Happy Investing.
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