This is the second blog in the Making Sense of Stock Series in case you missed the first blog, go check it out and then come back for a better understanding.
This blog will help you understand the different types of stocks available in the stock market.
Categorization based on Ownership
Equity Shares - Equity shares refer to units of equity(ownership of a company). Buying equity shares helps in acquiring the ownership of a company. These shares come with voting rights and do not have a fixed dividend. (Dividends will be covered in the next blog)
Preference Shares- Preference Shares refer to the type of share that exhibits the characteristics of both equity shares and bonds. Preference shares are different from equity shares because they receive fixed dividends whereas the dividend given to equity shareholders depends on the decision of the company. Another important difference between the two is that preference shareholders do not have voting rights.
NOTE- There are different types of preference shares which will be covered in upcoming blogs.
Categorization based on Market Capitalization
Market Capitalization (Market Cap) refers to the valuation of a company calculated by multiplying the current share price by the number of outstanding shares. Outstanding shares refer to the total number of shares that have been issued and held by investors.
Based on Market Cap shares can be classified as follows:
Large-Cap Shares- Large Cap Stocks refer to shares of well-established companies having a significant market capitalization. According to SEBI(Securities and Exchange Board of India), firms ranked between the Top 1 to 100 based on Market Capitalization fall into this category. E.g.- HDFC, TCS, etc.
Mid-Cap Shares- Mid Cap Stocks refer to shares of companies that have moderate market capitalization. According to SEBI(Securities and Exchange Board of India), firms ranked 101 to 250 based on Market Capitalization fall into this category. E.g.- Escorts, Relaxo Footwears, etc
Small-Cap Shares- Small Cap Stocks refer to shares of companies having a relatively small market capitalization. According to SEBI(Securities and Exchange Board of India), firms ranked 251 and above come under this category. E.g.- SG Finserve, NESCO Ltd., etc
Categorization as Blue Chip, Penny Stocks, and Defensive Stocks
Blue Chip Stocks- Blue Chip stocks are those issued by large, well-established, and financially stable companies with a history of strong performance. Companies that come under this category are usually leaders in their industry. For eg- HDFC Bank, TCS, Reliance Industries, etc. E.g.- Nestle India, TCS, etc.
Penny Stocks- Penny stocks refer to stocks of small, often newly formed and struggling firms. These firms usually have low market cap and trade at a very low price per share. While there is a possibility of enjoying significant financial gains, one should always keep in mind the high risk associated with penny stocks. E.g.- VI, Dish TV
Defensive Stocks- Defensive stocks refer to stocks of companies that are relatively less sensitive to economic downturns. This type is considered to be a safer investment option during times of economic uncertainty or recession. Investors turn to defensive stocks to mitigate risk. E.g.- HUL, Sunflower Pharmaceutical
That's it for this blog, in the next blog Capital Gains- meaning, types and taxation would be covered.
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