Types of Stocks

A stock represents more than just a piece of paper or a digital entry—it's a way for an investor to gain partial ownership of a company. This translates to a proportionate claim on their profits, assets, and major business decisions.

In the Indian financial landscape, stocks are traded majorly on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These stock exchanges serve as crucial marketplaces that enable investors to trade shares of publicly listed companies, providing transparency, liquidity, and a structured mechanism for capital market transactions. These exchanges are regulated by the Securities and Exchange Board of India (SEBI) that plays a pivotal role in maintaining market integrity, protecting investor interests, and ensuring fair, efficient, and systematic functioning of the securities market.

The value or price of a stock is influenced by the company’s operational performance, changing global and local economic conditions, sectoral trends, shifts in governmental and regulatory policies, as well as unpredictable natural disasters.

Investors seek out stock or equity investments with diverse objectives. The primary motivations for stock investments is capital appreciation over a long duration, taking advantage of short-term price fluctuations, and stable, regular income from dividends distributed by some companies. Stocks are a high-risk, high-reward asset class that promotes diversification of investment portfolio while also allowing some semblance of decision-making power in the company.

There are several different types of stocks that investors may opt for based on their financial goals and risk tolerance. We shall discuss most of these types and understand their features and differences.

Common Stocks

Common stocks are the most widely traded type of stocks. These are issued by the company when it first goes public through the Initial Public Offering (IPO) process or through the Further Public Offering (FPO) process. Owning these stocks gives the investors proportionate ownership in the company and also grants them voting rights when it comes to major business decisions.

However, these stockholders are not guaranteed dividends and in case of liquidation of the company, their claim on the assets comes only after debtors and preference shareholders of the company.

Preferred Stocks

Preferred stocks or preference shares refer to those whose owners are first in line to receive dividends, even prior to the dividends being distributed to common stockholders. These investors get priority when it comes to liquidation of the company. However, they generally do not have any voting rights in the company and cannot participate in major decision-making processes.

Preference shares are of many types depending on their features.

Convertible preference shares: Preference shares that can be converted into common shares.

Non-convertible preference shares: Preference shares that cannot be converted into common shares

Redeemable preference shares: Preference shares that can be redeemed or repurchased by the company at a pre-determined rate and date.

Non-redeemable preference shares: These preference shares cannot be redeemed or repurchased by the company.

Participating preference shares: These preference shares give the investors a right to receive extra dividend, above their fixed dividend amount, if the company’s profit exceeds a predetermined amount. It also gives them a right to the surplus assets of the company if and when it undergoes liquidation.

Non-participating preference shares: These preference shares do not give the investors a right to receive extra dividends. The investors only receive the predetermined fixed dividend amount regardless of the company’s financial performance.

Cumulative preference shares: These preference shares allow the investor to receive the arrears of dividend from the period when the company was not making any profits. They receive a cumulative dividend when the business starts turning a profit.

Non-cumulative preference shares: These preference shares do not give the investors any rights to dividends from the year that the company did not make any profits. They only receive dividends for the years that the company generates profits.

Adjustable Preference Shares: These shares have a variable dividend rate that changes as per the prevalent market interest rate. This keeps investors protected from the interest rate fluctuations and inflation.

Preference shares with a callable option: Callable preference shares allow the company to repurchase them at predetermined dates and prices, outlined in the prospectus. Investors receive higher yields to compensate for the risk of early redemption, which could curtail their dividend income.

Growth stocks versus value stocks

Some stocks tend to see higher price momentum and growth rate in a shorter duration. These stocks are termed as growth stocks as they give investors an opportunity to make big gains through short-term trades. Due to the higher price volatility, these stocks tend to be priced higher. These stocks are usually from young companies that operate in new and highly competitive sectors and prefer reinvesting their profits rather than distributing dividends. They have higher earnings per share (EPS) and higher valuations.

On the other hand, some investors aim for capital appreciation over a longer period of time and prefer stable stocks. These are referred to as value stocks. The main feature of these stocks is their low valuations and hence the lower prices. They generally distribute dividends regularly and have well-established and old businesses. However, they carry a risk of not giving the expected capital appreciation over the long-term as no business is guaranteed to remain profitable at all times.

Dividend-paying stocks vs non-dividend paying stocks

Companies that have a consistent track record of distributing profits to shareholders through regular dividend payments, on a quarterly or annual basis, are termed as dividend stocks. Dividend stocks are typically appealing to investors that seek a steady income from their investments instead of just price appreciation and are generally well-established businesses. These stocks are particularly attractive to investors who prioritise reliable and predictable cash flows, such as retirees, income-focused portfolios, or those seeking to balance growth investments with more stable returns. However, some investors may shun these stocks as it indicates that the company does not reinvest the profits back in the business which could affect future earnings.

Meanwhile, some investors prefer companies that give out little to no dividends and prefer reinvesting their earnings back in the business to boost growth. These stocks are known as non-dividend paying stocks. These are often chosen by investors that prefer swift capital appreciation rather than a steady stream of income. These stocks generally come from businesses that are still young and operating in highly competitive segments of the economy.

Large-cap, mid-cap, and small-cap stocks

Stocks can be divided into three broad categories based on their market capitalisation. Market capitalisation is calculated by multiplying the number of free float or outstanding shares of the company by the price of the share.

Large-cap stocks

Large-cap stocks refer to the top 100 companies with the highest market capitalisation, as per SEBI’s classification. These companies exceed market capitalisation of ₹20,000 crores. They are also referred to as blue-chip stocks and make up the benchmark indices NIFTY50 and SENSEX, of the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), respectively. These stocks are considered to be relatively more stable and secure as compared to their mid-cap and small-cap counterparts.

Their established business models, extensive resource networks, and financial resilience enable them to weather economic downturns more effectively than their smaller counterparts and are more preferable for investors that do not wish to take on too much risk but still want to take advantage of the high returns potential of equity markets.

Mid-cap stocks

Mid-cap stocks represent companies that have a moderate market capitalisation. As per SEBI’s classification, these stocks rank from 101 to 250 in terms of market value, with a market capitalisation of approximately ₹5,000 crores to ₹20,000 crores. They exhibit greater volatility than large-cap stocks and are thus considered riskier. These stocks make up the NSE’s Nifty Midcap100 index.

These enterprises have established viable business models while also retaining significant growth potential as they likely haven’t yet attained market dominance in their respective segments. They are preferred by investors with a moderate risk appetite who seek higher potential returns than offered by large-cap stocks while avoiding the extreme fluctuations of small-cap stocks.

Small-cap stocks

Small-cap stocks refer to companies that have a market capitalisation less than ₹5000 crores. Small-cap stocks are known for higher risk and volatility but they also offer a significant growth potential. However, due to their volatility, small-cap stocks are considered riskier compared to larger, established companies. These stocks make up the NSE’s NIFTY Smallcap100 index.

These companies often operate in niche markets or regionally, making them attractive to aggressive investors seeking high returns. However, the lack of a long track record and their susceptibility to market fluctuations means that investors must carefully assess the financial health and future prospects of these companies before investing.

Conclusion

In conclusion, understanding the different types of stocks—whether common, preferred, growth, value, dividend-paying, non-dividend paying or categorised by market capitalisation—helps investors align their portfolio with their financial goals and risk tolerance levels. Each type offers distinct characteristics and by carefully evaluating the performance, stability, and growth potential of various stocks, investors can diversify their investments and make informed decisions that suit their long-term financial objectives.