Classes of stocks (Part 1)
Stocks are financial assets that represent ownership of a corporation. They grant owners of the stocks voting rights and dividends on the investments. However, how one achieves that is based on what kind of stock they choose to invest in.
For example, a growth stock is bought with the hope that the value of the corporation (and its stocks) will appreciate significantly over time. That means there is little focus on dividends as long as the ability of the stock to be much more valuable than it was when it was acquired is guaranteed.
There are several types of stocks and their classification is usually on certain metrics. Stocks can be classified by capitalization, ownership types, dividend payments, fundamentals, risk profile, and price trends. This article would deal with the first three types of classification.
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Stocks Types Based on Market Capitalization
The market capitalization of a corporation represents an estimation of a company’s worth and an aggregate estimate of the company’s value. It gives an idea of how stable a company’s stock is and gives an educated guess of the company’s size. According to market capitalization, there are large stocks, mid-cap stocks, and small-cap stocks.
Large-cap stocks are stocks belonging to companies with a value of $10 billion or more. This classification is used for companies in the US and some other global determinations but can differ in different countries. Large-cap stocks include stocks of companies like Apple and Microsoft. These stocks are stable and give secure dividends, but are unlikely to give very high returns in the short term.
Mid-cap stocks belong to companies valued between $2bn and $10bn. They provide a good opportunity for growth and hence more return in the short term but are also riskier in the long term than large-cap stocks.
Small-cap stocks have a market value between $300 million and $2 billion. They are usually companies that are starting out or are within a developing sector. They are riskier stocks to invest in as compared to mid-and large-cap stocks but they can give very good returns in the short term.
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Stock Types Based on Returns
When you invest in a company, you usually get some financial dividends or returns as a profit on your investment. In classifying stocks types based on returns, there are growth stocks and income stocks.
Growth stocks are geared towards increasing the value of the initial investment over time rather than giving a fixed return. Income stocks provide a fixed, regular dividend that can be used as an income source. These stocks usually have a high and steady stock yield.
Stock Classification by Fundamentals of the Stock
Stocks can also be classified based on the fundamentals of the stock. These are some important metrics that help you evaluate a stock. They include its intrinsic value and stock value.
The price-to-earnings ratio (P/E ratio) can give a good indication of its nature. In using the fundamentals, investors can determine if a stock is undervalued or overvalued. These could help in many ways like deciding whether to invest in the stock and how to invest.
Conclusion
There are other ways to determine a stock type than the ways highlighted here. You can find more stock classification next week on the SikaTalks blog so stay tuned.
