Different Types of Stocks Categorization

 The most common way to categorize a stock is by its size of market capitalization.

Take the price of any stock and multiply it by the total number of shares available. That gives you the market capitalization of the company.

Share price of one share X total number of shares = market capitalization.

Make note, this means, the share price doesn’t tell you how big the company is. The total market capitalization tells you how big a company is.

Example: The share price of one stock of Reliance is around Rs 2000. The share price of one stock of MRF is around Rs 80,000. Still, Reliance is a much bigger company.

When you hear someone say, “Apple is the biggest company in the world”, they are referring to its market capitalization. It means, there’s no company in the world with a market capitalization greater than Apple.

Based on market capitalization, stocks can be categorized as the following:

+ Large cap

+ Mid cap

+ Small cap

As the names suggest, large cap is a list of big companies, mid cap is a list of smaller companies, and so on.

This list varies from country to country.

As with many things in the investment world, stocks can be categorised in a million ways (even when looking only from an investment perspective).

In India:

1) Large cap: 100 biggest companies

2) Mid cap: 101-250 biggest companies

3) Small cap: 251 and below companies

4) Growth stocks are stocks that are expected to grow at a rate much above that of the average market.

Growth stocks very often do not give a dividend. Many also don’t have profits. Investors chase after such stocks because they believe these stocks would be of great value in the future. Growth stocks investing is considered slightly riskier too.

5) Value stocks are those stocks that seem to be underpriced.

Many investors analyse the earnings, debt levels, valuation and other such metrics to decide if a stock’s price is below what it should be (according to them).

If the stock price is below the level they think it should be, they go on to purchase the stock.

The idea is that these investors pay a lower price for a stock. Investors who swear by this method are called value investors.

Growth vs value investing are two popular styles that are pitted against each other.

6) Penny stocks are usually stocks whose values have fallen massively due to some negative event or events. The concept of penny stocks in India wasn’t a very popular one until recently.

In the US, penny stocks literally refer to stocks whose prices are below $1.

In India, the definition of the same is for the stocks whose price is below Rs 10.

For some reason, penny stocks are viewed by many as an opportunity to make big returns. This is actually not true at all.

More times than not, these stressed companies take very long to recover and gain share price slowly. Or, many times, they just die out. Very rarely, some of these companies make very fast recoveries. These are the ones where quick returns can be made.

A massive mistake that many investors make is that of assuming that any company whose price has gone down will climb back up again. Countless investors have lost money in penny stocks.

As always, an investor should look at individual companies to assess how their future is going to be.

If they’re good, invest in them. Whether they are a penny stock or not, should largely be ignored.

And investing in stocks just because they are penny stocks should be absolutely avoided.

7) Dividend stocks: These are stocks that have a reputation of paying investors dividends on a regular basis. Companies that pay dividends are different - usually well-established and have a good reputation.

8) Cyclical stocks are stocks the price of which behaves in accordance with certain cycles.

These factors could be macroeconomic, other systemic cycles, annual cycles, etc.

One example of a cyclical stock would be agricultural stocks that are affected by the monsoons. It is not necessary that these cycles last 1 year. Cycles could be as short as a few weeks or be as long as many years.

9) Safe stocks are stocks that are stable and have a track record of good performance.

“Safe” in the world of stocks is a tricky concept to understand. Investors are aware that with the stock markets, there is always an inherent risk.

In fact, another concept that investors must get used to is that there is no completely safe investment at all - even the safest of investments (gold, FD, etc) have risks associated. Everything is just a matter of greater or lesser risk.

Another characteristic of safe stocks might be that they don’t grow as fast as other more dynamic stocks.