Common Stocks
Common stocks represent ownership in a company and give shareholders voting rights in corporate decisions, such as electing the board of directors.
Investors primarily buy common stocks for capital appreciation, meaning they hope the stock price will rise over time.
While some companies pay dividends to common shareholders, these payments are not guaranteed and can fluctuate based on the company's performance.
In case of liquidation, common stockholders are the last to be paid after debt holders and preferred stockholders, making this type of stock riskier but with higher potential returns.
Preferred Stocks
Preferred stocks also represent ownership in a company but work more like fixed-income investments. Holders of preferred stocks receive fixed dividend payments, which makes them more predictable than common stocks.
However, preferred stockholders usually do not have voting rights. The advantage of preferred stocks is that in the event of a company’s liquidation, preferred shareholders are paid before common shareholders but after debt holders.
These stocks are often chosen by investors looking for steady income rather than high capital appreciation.
Based on the type of business and their valuations, stocks can be divided into growth and value stocks:
Growth Stocks
Growth stocks belong to companies that are expanding rapidly and reinvesting their earnings into further growth rather than paying dividends. These stocks are known for their potential to deliver high returns over time but come with increased risk due to price volatility. Investors who buy growth stocks believe in the company’s long-term potential and are willing to hold onto their investment despite market fluctuations.
Value Stocks
Value stocks are shares of companies that are considered undervalued compared to their intrinsic worth. These stocks often have strong fundamentals but are overlooked by the market, leading to lower stock prices. Investors buy value stocks with the expectation that the market will eventually recognize their true worth, leading to a price increase. They may also provide dividends, making them attractive to those seeking both capital appreciation and income.
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks are categorized based on a company's market capitalization as per SEBI:
- Large-Cap Stocks: Companies ranked 1st to 100th in terms of market capitalization.
- Mid-Cap Stocks: Companies ranked 101st to 250th in terms of market capitalization.
- Small-Cap Stocks: Companies ranked 251st and beyond in terms of market capitalization.
Each type of stock serves a different investment purpose. While common and growth stocks are suited for those seeking high returns, preferred and value stocks are often chosen for stability and income. Large-cap, mid-cap, and small-cap stocks offer varying levels of risk and reward, allowing investors to diversify their investments based on their financial goals.