With the elections just round the corner, everyone is eager to know the effect that the future government could have on the stock market. Speculation is everywhere and predictions are a dime a dozen. However, investing effectively in the stock market is about more than just making guesses about future possibilities.
A successful investor must know about the different types of stocks, shares, and other investment instruments. Moreover, they must understand exactly how the different types of stocks are categorized and classified and the risks and benefits associated with each of the categories.
With the stock market being a potent engine of economic growth and potential investors eager to participate in the wealth creation process, a country like India needs greater awareness of the various investment instruments and their classification. Numerous factors such as dividend payment, the size of the company, the risk and volatility involved, and the industry, affect the classification of particular stocks.
Some of the parameters according to which stocks are generally classified have been mentioned below.
On the basis of this criteria, stocks can be divided into three basic categories, namely common, hybrid, and preferred stocks. Preferred stocks promise the buyer a minimum amount of profit, whereas common stocks may only yield a profit when the company has earned sufficient revenue. Hybrid stocks are essentially just preferred shares that can, after a time, be converted into common shares.
Small-cap, mid-cap, and large-cap are the three categories into which shares can be divided on the basis of market capitalization. Cap, in this context, it short for capitalization. Small-cap stocks are typically those issued by small companies that are not very well established but have great potential for growth. Mid-cap stocks are those issued by medium sized companies that offer both stability and moderate to high growth potential. Large-cap stocks are those issued by the largest and most reputed companies which are household names. Large-cap stocks offer great stability but relatively little growth potential.
On the basis of dividend payments, you can classify shares into two categories, namely income stocks and growth stocks. Income stocks are those issued by large, stable companies that distribute a large dividend vis-a-vis their price. Hence, they are ideal for generating a higher income but have limited growth potential. Growth stocks, on the other hand, are issued by smaller companies that offer lower dividends but grow very quickly, leading to a rapid appreciation in the value of the shares. This ensures that investors can get high returns when the stocks are eventually sold.
Some stocks are considered to be riskier than others as there is greater volatility in their prices. However, riskier stocks also have more potential for profit. High beta stocks are riskier than blue chip stocks, as a beta value greater than 1 means that the share in question is more volatile than the stock market as a whole. On the other hand, blue chip stocks are issued by well-established companies with steady earnings, and are therefore far more stable and safe.
The Angel iTrade Plan
These are just some of the ways in which the different types of stocks and shares are classified. If you are interested in share trading, then you can open a lifetime Demat account for free with Angel Broking, one of the largest stock brokerage firms in the country.
With the new Angel iTrade plan, you can start your journey as a stock market investor with only Rs. 15 flat brokerage for an order size of up to Rs. 50,000. The flat brokerage for an order size above Rs. 50,000 is just Rs. 30.
Leverage requirements guideline
Thus, this plan is perfect for those dipping their toes in the world of share trading. The Angel iTrade plan will offer you the perfect combination of stability and growth that will make your investments worthwhile and lucrative.