Stock is one the oldest forms of investments you can ever imagine. The stock market has been the best tool in lasting wealth creation for generations of investors.
Stock is a share of ownership in a company. This means when you buy stocks, you become part owner of the company. Imagine a company has 50 stocks and you buy 1 of them, you own 1% of the company, and if you buy 2 stocks, then you own 2% of the company’s share. Stock represents the ownership in a publicly traded company. Stocks are bought and sold on stock exchanges.
Why Do Companies Issue Stocks
The major reason companies issue stock is to raise money for their business growth from willing investors.
In addition, selling shares of your company essentially converts it into a highly liquid asset that can be easily traded. If a founding member or an investor wants to sell their portion of the company for profit, it’s much easier for them to do so.
Issuing stock is a great way to attract investors, as opposed to funding your company with debt, which could turn investors away. Investors typically compare the proportion of your company owned by shareholders to the amount owned by lenders. The more that’s owned by investors, the less risky your company is presumed to be.
Types Of Stocks
There are so many stocks available in the stock market currently. Many with great features and enticing interest.
In addition to that, xenofinance.com understands that there are certain parameters for which stocks are listed, and has grouped these stocks into 6 categories based on their features and importance.
1. Based on the company (Market capitalization)
These stocks are categorized in terms of the market value of the total company’s share. And they aredivided into 3 namely;
● Small Cap
● Medium Cap
● Large Cap
● Small Cap
The stocks with the smallest values are known as a small cap in market capitalization. The small size companies usually have small cap stocks. Small cap stocks can be beneficial to the investors in the longer run. Small companies with potential can grow enormously in the future. So investors can buy stocks in smaller companies at a cheaper value to get huge gains in the future. You can buy small cap stocks in the company with a market capitalization in the range of up to Rs. 250 crore.
● Medium Cap
The medium sized companies generally offer medium cap stocks to the investors. If you invest in medium cap you invest in companies with good growth potential and better stability than small cap companies.
● Large Cap
Unlike other types of stocks of Market capitalization, large cap stocks have huge cash reserves at its disposal. However, the growth potential of a large cap is not rapid and can underperform when compared with small cap stocks. Despite that investors can gain higher dividends compared to other types of stocks.
2. Based on the Business cycle
Based on business cycles following are the different kinds of stocks:
● Cyclical stocks
● Non-cyclical stocks/ Defensive stocks
● Cyclical stocks
The stocks which are parallel to the market performance are known as cyclical stocks. The economy and the cyclical stocks are directly proportional in relation. Examples of different cyclical industries are automobile, construction, hotels, travel and tourism, luxury products and so on.
● Non-cyclical stocks/ Defensive stocks
The revenue generation of non-cyclical industries remains unaffected even during the economic slowdown. The stocks in these industries have the growth potential even during the depression. These industries produce goods that people never stop consuming. Tobacco, Alcohol producing companies can also be categorized in this type.
3. Based on Investment cycle
Based on investment type stocks can be classified into following types:
● Growth stocks
● Value stocks
● Dividend stocks
● Growth stocks
Stocks bought in the company with a higher growth rate is called as growth stocks. Investors buy stocks at higher prices in these companies to enjoy the fast pace in their growths.
● Value stocks
Unlike growth stocks the value stocks grow at a slower pace. But the market pricing of these stocks is also less as compared to their true value.
● Dividend stocks
The dividend stocks generate consistent returns and the investors get regular incomes in the form of gains. The dividend stocks pay the investors a large, steady, and increasing dividends
4. Based on Location
There are two different types of stocks based on the location of the companies.
● Domestic stock
● International stock
When the company and the investor are located in the same country the stocks are called domestic stocks. Similarly, international stocks are when the company and the investor reside in different countries.
5. Stocks on the basis of ownership rules:
This is the most basic parameter for classifying stocks. In this case, there are three types of stocks. And they are;
● Preferred stocks
● Common stocks
● hybrid stocks.
The key difference between common and preferred stocks is in the promised dividend payments. Preferred stocks promise investors that a fixed amount will be paid as dividends every year.
A common stock does not come with this promise. For this reason, the price of a preferred stock is not as volatile as that of a common stock. Another key difference between a common stock and a preferred stock is that the latter enjoy greater priority when the company is distributing surplus money.
However, if the company is getting liquidated – its assets are being sold off to pay off investors, then the claims of preferred shareholders rank below that of the company’s creditors, and bond- or debenture-holders. Another distinction is that preferred shareholders may not have voting rights unlike holders of common stocks.
Hybrid stocks:
Some companies also issue hybrid stocks. These are often preferred shares that come with an option to be converted into a fixed number of common stocks at a specified time. These kinds of stocks are called ‘convertible preferred shares’. Since these are hybrid stocks, they may or may not have voting rights like common stocks.
6. Stocks with embedded-derivative options:
Some stocks come with an embedded derivative option. These stocks can either be;
● callable stocks
● putable stocks
A ‘callable’ stock is one which has the option to be bought back by the company at a certain price or time. A ‘putable’ share gives the stockholder the option to sell it to the company at a prescribed time or price. These kinds of stocks are not commonly available.
How do I select a good stock?
Here are the few tips that will pave the way while you invest in any type of stock. Before you invest in any company you need to consider the following points:
Know The Fundamentals of the company
Before you start investing you need to learn different financial aspects of the company. Understand the revenue, earnings, and future growth of the company. Learn about the promoter’s stocks (owner’s stocks) and outstanding stocks (stocks owned by shareholders) of the company. Identify the size of the company based on its market value.
Knowledge of products and services offered
It is essential to understand and learn about the products offered by the company. If you understand the company offerings you can easily make trading decisions of buying and selling stocks.
Know The Future of the company
When you invest in the stock of any company think about the growth potential in the longer run. Avoid investing in companies with a shorter life of a few years. Invest in companies that will continue to run for the next 15-20 years.
Understanding the unique selling points of the company
For better analysis identify the unique selling points of the company. The company you choose should be better than its competitors.
Avoid Companies With Huge Debt
You should definitely avoid investing in companies with huge debts. To understand the company debts you need to scrutinize the financial documents. In the banking sector avoid investing in stocks with huge NPA’s (non-performing assets). Companies with debts can hamper your investments.
Finally!! when you wish to trade stock, be critical about understanding the different stocks before you start investing. Also do a thorough research on the fundamentals of the company before you invest your money.
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