The stock market is the largest and most comprehensive in India. It provides an integrated platform to buy and sell shares, derivatives, mutual funds, and structured products. The platform is built around a centralized equity trading system that facilitates trading between the public and private markets.

The Indian stock market is a platform with thousands of stocks suitable for every investor to invest and make profits. Whatever your investment strategy, goals, and time horizon, you can find stocks ideal for achieving your goals in the set period. However, when it comes to investing in stocks, it is important to choose the most suitable types of stocks to increase the profit margin and reduce the chances of losses. You can invest in dividend-paying stocks if you want steady and low-risk income, while you can invest in growth stocks to earn higher profits and have a slightly higher risk tolerance. Overall, there are numerous types of stocks you can consider and match with your investment plan to ensure a better investment approach.

This blog will help you learn about stock categorisation and how it can help you make better investment decisions.

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Stocks can be different based on class, size, volatility, etc., and fall into a specific stock categorisation. Here are the classifications of different types of stocks:

Categorisation criteria: Market capitalisation

The stock categorisation can depend on the company’s market capitalisation, which is the total value of the company’s outstanding stock. Based on market capitalisation, stock categorisation includes large-cap, mid-cap, and small-cap. Large-cap stocks are of established companies (top 100) that are leaders in their industry and are mostly included in the Nifty 50 index. Mid-cap stocks rank between 101 and 250 on the list of top companies with the highest market capitalisation. On the other hand, small-cap stocks belong to companies that have a lower market capitalisation. These stocks are priced lower and are higher in volatility.

Categorisation criteria: Ownership

Based on ownership, stock categorisation includes common, preferred, and hybrid stocks. Common stocks give shareholders voting rights and potential dividends, representing ownership in the company. Preferred stocks offer priority in dividend payments and asset liquidation but usually do not come with voting rights. Although they still give ownership to the shareholders. Hybrid stocks include the features of both common and preferred stocks. The most common type of hybrid stock is a convertible bond that allows holders to convert their existing bonds into debt or equity. Two other types of hybrid stocks are convertible preference shares and stocks that come with embedded derivative options.

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Categorisation criteria: Fundamentals

Most investors analyse the fundamentals of the company before buying a stock. Growth stocks are the ones that are expected to show above-average earnings growth compared to the overall market. Value stocks are stocks that have a higher intrinsic value, are considered undervalued based on their promising fundamentals and have the potential to offer capital appreciation in the future. Dividend stocks do not appreciate highly in their price but offer regular dividends without much volatility. Investors select such stocks because of their stable earnings and constant dividend payouts.

Categorisation criteria: Price volatility

Price volatility is the constant fluctuation in the price of stocks, which gives investors opportunities to make profits based on the difference between the buying and selling prices. Investors analyse a financial metric called the coefficient of beta to determine price volatility. The higher the beta value, the higher the price volatility. High-volatility stocks have a high beta value and experience significant price fluctuations. Low-volatility stocks have a lower beta value and more stable prices that do not fluctuate heavily. This stock categorisation helps investors choose stocks based on their risk tolerance levels.

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Categorisation criteria: Profit sharing

At the time of purchasing a stock, you become the shareholder and part owner of the company and are entitled to receive a share of the profits based on your ownership. Generally, the companies distribute profits through dividends, announced as an amount per share. Dividend-paying stocks distribute a portion of the company’s profits to shareholders, offering income and indicating that the company has earned high profits. Non-paying dividend stocks generally are the ones that have either incurred a loss or have re-invested the profits earned for various business purposes such as debt repayment or expansion. Dividend-paying stocks are generally less volatile than non-dividend-paying stocks.

Categorisation criteria: Economic trends

Economic trends highly affect stock categorisation as stocks are sensitive to economic changes and the prevailing economic condition. If the economic condition is negative, it is a possibility that the stocks may enter a bearish trend. In contrast, stocks may enter a bullish trend if the economy is performing positively. Cyclical stocks, such as those in the real estate and automotive sector, are influenced at par with the economy. If the economy is doing well, such stocks increase in price and vice versa. Hence, investors invest in cyclical stocks when the economy is performing positively. On the other hand, defensive stocks, such as those in the FMCG sector, are less sensitive to economic conditions. Investors buy these stocks without focusing much on the current economic situation.

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Investing in the stock market can be highly beneficial and result in hefty profits if you base your investments on extensive stock research. One of the most important factors while researching stocks is understanding how different stocks are categorised. Since there are numerous industries and sectors, there can be different stock categorisations, which can influence your investment value over time. Now that you understand stock categorisation, you can better analyse stocks to align your investments with your investment goals, risk tolerance, and time horizon.