When we hear the term, ‘stock’ we see people confused or afraid. This is because there are very few people who are cognizant about the various types of stocks and their characteristics. They have come to believe that investing in stocks = bearing heavy losses. However, its the opposite which is true! Investing with proper planning has made people Millionaires. Let’s take an overview of these.
What is a Stock?
A stock is referred to as a term to describe the ownership certificate of a particular company. It can also be called share, referring to the stock certificate of the company. If you hold a share of a company you become a shareholder, .i.e. a part owner. There are 2 types of stocks.
- Common Stock :
Like its name, the common stocks are very common, when people talk about stocks, in general, they are always referring to this type of stock. The majority of stocks are issued in this form. Common stocks represent the company’s ownership and a claim on the profits earned each year. Investors of a company get one vote per share to elect board members, who look into the major decisions to be made by the management. When compared on a long-term basis, common stock yields higher returns than any other investment. The main reason for higher returns is that this stock requires the highest amount of risk and if a company goes bankrupt and liquidates, the common shareholders will not receive money until all the creditors, bondholders and preferred shareholders are paid.
- Preferred Stock
The preferred stock represents only some degree of ownership in a company and does not come with the same voting rights. They vary from company to company. With preferred shares, the investors are usually promised a fixed dividend forever. This is not like the common stock, which has variable dividends, that are never guaranteed.
In event of liquidation or bankruptcy the preferred shareholders are paid off before the common shareholders. Preferred stock can also be callable, which means the particular company the option to purchase shares from shareholders anytime for any reason. Some people also consider the preferred stock to be more like debt than equity.
Market Capitalization :
The Market capitalization of a company refers to the total number of outstanding shares in the market multiplied by the current price per share. This provides the investor with an estimated valuation of the company. For example, A company has 10,000 outstanding shares in the market, and each of them is at Rs 10. Thus, its market capitalization will be total outstanding shares multiplied by the price per share, which is Rs 1 lakh.
Based on the current market capitalization, the stocks are classified into 3 types.
- Large Cap Stocks: The market capitalization of these companies ranges above Rs.20,000cr. Large-cap companies are said to have a strong market presence and their stocks are generally considered to be very secure as they have a solid structure in place to tap the market.
- Mid Cap Stocks: The market capitalization of these companies is considered to be in the range of Rs.5,000cr to Rs.20,000cr. These stocks have a tremendous scope for growth. They are pegged to be the next Large Cap stocks.
- Small Cap Stocks: The small-cap companies are either start-ups or companies which are still in the development stage. Their market capitalization is ranging below Rs.5000cr. Information of such companies isn’t easily available and a lot depends on the current management and their operational style. Most investors who make a killing, earn their money in this segment.
Knowing about the functions and performance of each type of stock is important as this is the basic of stock market investing. Learning to read Balance Sheets, profit and loss accounts and other details of a company’s functioning are integral for any investor. BSE Institute Limited, a 100% subsidiary of BSE India offers you an executive course on Investment Management which will help you learn all about investing in stock markets and build your career as an Investment Banker.