What are the Types of Stocks in India?
A stock is a public share of a company, and buying a stock helps you invest in that company. There are many ways in which stocks can be classed. Knowing these differences can help you determine which type of stock is suited to your investment goals. Here are the most commonly known types of stock in India: common vs preferred stock.
Common Stock vs Preferred Stock
Common stock allows an investor to own a share in a company’s revenue in addition to the right to vote. Most stocks are issued in this form. Investors receive one vote per share of common stock allowing them to elect board members who will eventually oversee the company’s decisions. Anyone who buys common stocks also has the potential to earn dividends. A dividend is a regular payment made to all stock owners. However, in the case of common stocks, these dividends are frequently variable and not guaranteed.
Over a long period of time, common stocks can yield higher returns than most other investments by means of the company’s capital growth. However, this return comes at a price. Common stocks are also very risky investments. Suppose you are a common shareholder in a company. If this company goes bankrupt and liquidates, its creditors, preferred shareholders, and bondholders are paid before the common shareholders receive funds.
This is where the preferred stock comes in. Similar to common stock, preferred stock enables an investor to have a certain degree of ownership in a company. However, unlike common stocks, the voting rights of the preferred shareholder often may not exist or vary depending upon the company. Another key difference is that when one buys preferred stocks, their dividends are usually higher, fixed and guaranteed forever. Preferred share prices are also less volatile than common share prices, making them less likely to lose or gain value.
Another advantage is that in a sudden liquidation crisis, preferred shareholders are prioritized over common shareholders when it comes to payouts. However, since it is more ‘prestigious’ preferred stock can also be ‘callable’ which implies that the company possesses the option to repurchase the preferred shares from a shareholder for any reason at any time. This is usually done for a premium. As these shares are lower risk most investors class preferred shares in between common shares and bonds, making them suitable for protecting income over wealth creation.
What are the Types of Stock Classes?
Another way we can differentiate the types of stocks in India is by classifying them using certain criteria. Here are the commonly used classes to differentiate between stocks.
- Company-Size Classification: A company’s market capitalization determines its size as a large-cap, mid-cap, or small-cal company with respective stocks. A stock in a company with a market capitalization of over ₹20,000 crores is generally classed as a large-cap stock in India. A company whose market capitalization is between ₹20,000 crores ₹5000 crores offers mid-cap stocks in India. Stocks in companies with a market capitalization of less than ₹5000 crores are considered small cap stocks in India.
- Sector Wise Classification: As companies are often divided by their sector, so can stocks. In India, we have the Agriculture and Allied Sector, Industry Sector, and Services sector. Each sector has a different contribution to the country’s GDP with the Agri sector contributing around 17%, Industry sector contributing 29.6%, and services contributing the remainder of 54.3%. However, there are multiple industries within each sector with different stocks. The Services sector alone comprises of real estate, financial services, transport, public administration, trade, communication, defense, hotels, etc.
- Location-based Classification: Stocks are also grouped by where the company is located which is usually done country-wise. In India, stocks are classed location-wise as stocks from Indian companies and those from foreign companies. Foreign stocks are useful because they diversify your portfolio. You can also purchase stocks in emerging markets in a different country which has the potential for expansion.
- Growth Potential Classification: Stocks are also described as having growth potential or value. Companies which are quickly growing, or are expected to grow quickly offer growth stocks. With the expectation of more returns, investors may be willing to pay more for growth stocks. There are also value stocks that are essentially overlooked, underrated and thereby underpriced. It is assumed that these stocks will increase in value soon as they are currently in a short term decline, or they haven’t been discovered yet.
In conclusion, the different types of stocks are usually common and preferred stocks. However, stocks can also be divided based on company size, growth potential, location, and sector.