Types of Shares in India: Different types of Shares in the Stock market

On the Indian stock exchange, there are multiple types of stocks that can be traded by shareholders and investors. The classification can be based on different factors and some of them also have their own unique features and characteristics. In this article, we will discuss different types of stocks that you can invest in on the Indian stock exchange.

What is a Share?

A company may choose to issue its equity or the right to claim profits of the company in order to raise capital for future growth. When you buy a share of a company, you are eligible to receive a certain portion of the company's profits in the form of dividends as well as participate in the decision-making process of the company. Although, the right to receive dividends is not binding on the company and depends on the decision of the Board of Directors of the firm.

Categorization based on the stock class

The categorization of company shares depending on the class is dependent upon the shareholders’ voting rights. Some company stocks give the shareholders the right to partake in the decision-making process of a company by allowing them to cast their vote. On the other hand, there exist the exact opposite of the previous stocks that do not allow the shareholders to cast their votes in the company’s decision-making process.

Types of shares based on the market capitalization of companies

Market capitalization is a very important aspect when it comes to the stock market. The market capitalization of a company is calculated by multiplying the present-day share price of the company in the stock market with an outstanding amount of shares available in the same. The classification of stocks based on market capitalization is listed below:

Large-cap stocks

Large-cap stocks are mainly the stocks of already established companies, multinational companies, and conglomerates. Blue-chip companies are also included in the large-cap stocks. These companies are fundamentally and financially strong as well as they have enough reserve cash to go through tough market conditions. 

As an investor, you also need to note that, if a company is a large cap, that does not mean it will develop faster. Nevertheless, in comparison to mid-cap and small-cap companies’ shareholders of large-cap companies will receive higher dividends and their investment capital is safe and preserved for a long time. Some of the large-cap companies in the Indian stock market include Reliance Industries Ltd, Tata Consultancy Services Ltd, Hindustan Unilever Ltd, ITC Ltd, etc.

Mid-cap stocks

Medium-sized companies with a market capitalization of Rs. 250 crores to Rs. 4000 crores come under the mid cap category. The mid cap companies are well recognized in the market for their growth potential along with the stability of their investment funds. 

These companies are considered seasoned players in the market. Apart from the size of their market capitalization, mid cap companies have steady growth and are very similar to the blue chip stock companies as a long-term investment option. Some of the mid cap companies in the Indian stock market include Muthoot Finance Ltd, Ashok Leyland Ltd, Zomato Ltd, Colgate-Palmolive (India) Ltd, etc.

Small cap stocks

Small sized companies that have market capitalization under Rs. 250 crores are considered as small cap stocks. These companies have tremendous potential to experience massive growth in the future and the stocks of the small cap companies also grow at a good pace.

Although in comparison to mid cap and large cap company stocks it has the smallest value. Investors who are willing to earn long term benefits and do not care about dividend incomes and short-term volatility can opt for small cap stocks.

The small cap stocks are available at a very low price and that is why investors can benefit from them by investing in the companies at their initial phase. Since they are relatively new to the stock market there is no assurance about their stock market performance. Some of the small cap companies in the Indian stock market include Kajaria Ceramics Ltd, Ramco Cements Limited, Godrej Industries Ltd, etc.

Kind of shares based on the type of ownership

Depending on the ownership of stocks, it can be divided into three different categories. These different categories are:

Common and preferred stocks

Every year the owner of preferred stocks receives a fixed amount of dividends. Moreover, preferred stocks are not volatile. On the other hand, common stocks are a bit volatile but it also has the benefit of priority where there is surplus money to be distributed by the company. Also, 

At the time of liquidation debenture holders, creditors and bondholders have more rights over preferred stockholders. The common stockholders also enjoy voting rights which is a privilege not associated with preferred stocks.

Hybrid Stocks

There are also companies in the Indian stock market that offer preferred shares but provide the option to convert them into common shares later on (within a stipulated period of time). These types of stocks are regarded as hybrid stocks or convertible preferred shares which may or may not provide you with voting rights.

Stocks with derivative options

When a share comes with a derivative option that means it is not commonly available in the market as well as it is putable or callable. Any callable stocks come with an option to be bought back by the company within a specific point of time and at a certain price. On the other hand, putable stocks offer the shareholder to sell the shares back to the company at a specified time and price.

Types of shares depending upon the payment of dividend

Growth stocks

If you purchase growth stocks you won’t be receiving a high amount of dividends because growth stock companies mostly choose to reinvest their earnings in order to grow quickly and that is why they are regarded as growth stocks. 

The value of the growth stocks rises faster which in turn enables the investors to earn higher revenues. Growth stocks are best for those types of investors who are looking for long term growth potential and not a monthly source of income. Other than that growth stocks are also quite risky. 

Income stocks

Income stocks provide the shareholder with a higher amount of dividends in comparison to growth stocks. The dividends distributed by these companies are regular and the income of the shareholders is also quite higher, that is why it is regarded as income stocks. Although income stocks can provide you the stability of income but at the same time, they do not promise you higher growth or a rise in the value of stocks. Preferred stocks are also some under-income stocks.

As an investor, if you are seeking a secondary source of income with low risk involved then income stocks can be a good investment opportunity for you. Also, the dividend you will receive from the companies will not be associated with a tax deduction and thus it is also great for long-term investment. 

Kind of shares depending upon the fundamentals

This categorization is based on the investment philosophy of value investors. According to value investors, any company’s share price should equal its intrinsic value. These investors also compare the stock prices of the company with its profits, earnings, etc. There are two types of shares according to this category:

Undervalued shares

Undervalued shares are very popular company stocks among investors and they believe in the intrinsic value of the shares. According to the value investor, the share prices of undervalued shares will significantly rise in the future. 

Overvalued shares

The stocks that have far exceeded the intrinsic value of the company shares are considered overvalued shares. 

Types of shares based on the risk associated with the stocks

Depending on the market volatility the risk level of stocks is determined. Nevertheless, the stocks that have a higher risk associated with them can also provide the investors and shareholders with great returns. On the other hand, low risk stocks can only generate lower revenues.

Blue chip stocks

The stocks of companies with a very low amount of liabilities, stable income source and pays dividend regularly to the investors are considered as blue chip stocks. These are very large and already established companies that also have a strong financial history for a long time. Blue chips stocks are mostly a safe investment for investors and shareholders alike. For example, Apple Inc, Meta, Google, Amazon, etc.

Beta stocks

The risk associated with Beta stocks is obtained by measuring the price fluctuation of the stocks. Beta or the measurement risk can either be positive or negative which will make sure if it is in sync with the stock market or not. If the beta is high then the risk quotient of the beta stocks will also become high. 

In case the value of Beta is more than 1 then it will signify that the share is more dynamic than the market. A lot of seasoned investors use Beta measurement in order to conclude their investment decisions. For example, International Flavors & Fragrances Inc., Sysco Corporation, Boston Properties Inc., Baker Hughes Company, etc.

Kind of shares based upon the price trends

This categorization is based on the price fluctuation of the company shares in the stock market.

Defensive stocks

Defensive stocks more or less remain affected by the current economic situation and are mostly preferred during poor economic conditions. FMCG company stocks can be considered defensive stocks. For example, Nestle India Ltd., Dabur India Ltd., Hindustan Unilever Ltd., Godrej Consumer Products Ltd., etc.

Cyclical stocks

The cyclical stocks belong to the group where the current economic conditions can have a huge impact on these stocks. As a result, these stocks experience market changes and high price fluctuations. During the stock market boom, these stocks experience massive growth but in poor economic conditions the growth slows down. Automobile company stocks fall under this category. For example, Tata Motors, Honda Cars, Maruti Suzuki, Hyundai Motors India, etc.