How are stocks classified and why

How are stocks classified and why


Stocks can be classified into many categories on different criteria:

a) the size of the company, 
b) dividend payment, 
c) industry, 
d) risk, 
e) volatility, 
f) fundamentals.

Stocks can be classified on the basis of ownership rules.

This is the most basic kind for classifying stocks. Meaning, the issuing company decides whether it will issue common, preferred or hybrid stocks.

There we can recognize

Preferred and common stocks.

The essential difference between common and preferred stocks is in the agreed dividend payments. Preferred stocks guarantee investors that a determined amount will be paid as dividends every year. Common stock does not have this characteristic. For this scheme, the price of the preferred stock is not volatile like common stock. Another important difference between common stock and preferred stock is that the preferred have a higher advantage when the company is giving excess money.

However, in case the company is getting sold or liquidated – its assets are being sold off to pay off investors. The claims of preferred shareholders position are below that of the company’s creditors, and bond- or debenture-holders. Another difference is that preferred shareholders do not always have voting rights, in contrast, holders of common stocks do have.

Furthermore, we can recognize:

Hybrid stocks

Some companies also issue hybrid stocks. These are usually preferred shares that come with an opportunity to be transformed into a fixed number of common stock at a named time. These type of stocks are known as ‘convertible preferred shares’. As these are hybrid stocks, they can or can not have voting rights.

Stocks with embedded-derivative stocks:

Some stocks have a set derivative option. This indicates it could be ‘callable’ or ‘putable’. A ‘callable’ stock is one which has the possibility to be purchased back by the company at a specific price or time. A ‘putable’ share gives the stockholder the right to sell it to the company at an appointed time or price. These type of stocks are not usually available.

How are stocks classified and why

The other classification is on the basis of market capitalization

Stocks are also divided on the basis of the market value of the total shareholding of a company. This is determined using market capitalization, where you increase the share price by the total number of issued shares. We can recognize three types of these stocks:

1) Small-cap stocks

As first we must be clear: ‘Cap’ is short for ‘Capitalization’. As the name implies, these are stocks with the smallest prices in the market. They often belong to small-size companies. Usually, described as the stock of publicly traded companies that have a market capitalization in scope from $300 million to about $2 billion.

These stocks are the best choice for an investor who wants to make notable gains in the long run; as long as the investor does not expect dividends and can resist price volatility. The reason behind is those small companies have the possibility to develop quickly in the future. 

So, an investor may benefit by buying the stock when it is cheaper in the company’s beginning step. Still, various of these companies are almost new. So, it is tough to prognosticate how they will play in the market.

Being small companies, extension flows dramatically influence their profits and earnings, giving prices rising. On the other hand, the stocks of these companies show volatility and may fail dramatically.

2) Mid-cap stocks

Mid-cap stocks are stocks of medium estimated companies. Usually, a mid-cap is a firm with a market capitalization between $2 billion and $10 billion.

These are stocks of well-known companies, known as experienced participants in the market. They give you the double benefits of getting stocks with good increase potential but also the stability of a bigger company.

Mid-cap stocks also incorporate baby blue chips. That are companies that give steady growth supported by a good track record. They are like blue-chip stocks but need their capacity. These stocks can grow great over the long term.

3) Large-cap stocks

Stocks of the giant companies in the market. Large Cap Stocks points to companies which have a market capitalization of more than $10 billion. Market Capitalization is the container share the company is holding in the industry. It is calculated by multiplying the number of a company’s shares by its stock price. They are frequently blue-chip companies.

Being organized companies, they have at their disposition large resources of cash for new business chances. Still, the absolute size of large-cap stocks does not give them to grow fast as smaller capitalized companies can do. Hence, smaller stocks may beat them over time.

Investors, nevertheless, get the advantages of receiving comparatively higher dividends in comparison to small- and mid-cap stocks. At the same time, they are also ensuring the long-term protection of their capital.

Stocks can be classified on the basis of dividend payments

Dividends are the main reservoir of income until you sell the shares for a profit. Stocks are classified on how much dividend the company pays.

1) Income Stocks

These are stocks that give a higher dividend in connection to their share price. They are also known as dividend-yield. So, a higher dividend means a higher income. That’s the reason why these stocks are also named income stocks.

Income stocks normally come from stable companies that give constant dividends. Still, these companies usually are not high-growth companies. As a consequence, the stock’s price may not rise as much as some investors expect. Preferred stocks are also income stocks. They ensure consistent dividend payments too.

The investors who are seeking a secondary or smaller source of income prefer income stocks. They are comparatively low-risk stocks.

Investors don’t pay tax for dividend income. This is one reason more for investors to prefer income stocks.

So how to find such stocks? Use the dividend-yield measure to recognize stocks that pay higher dividends. The dividend yield will show you how much an investor is earning from the investment. It is calculated by dividing the dividend announced by the share price and then formulated as a percentage.

2) Growth stocks

Not all stocks will pay high dividends. The companies favor reinvesting their earnings. This habitually supports the company grows faster. Hence, such stocks are usually described as growth stocks.

At the same time as the company grows, the cost of the shares will also rise. This provides the investor to earn a bigger return when the stock is sold. But this is connected with lower income through dividends. 

For this reason, investors favor such stocks for long-term growth possibility, never as a secondary income.

But, if the company stops to grow, it can not be described as a growth stock. This makes these stocks more risky than income stocks.

Stocks can be classified on the basis of risk

Some stocks are more hazardous than others. This is because their share values swing more. Still, just because a stock is risky does not mean investors should avoid it. Risky stocks can make you higher profits. Low-risk stocks, as difference, deliver you more moderate returns.

1) Blue-chip stocks

These are stocks of firmly established companies with constant earnings. These companies usually have lower debt and pay consistent dividends.

Blue-chip stocks are accepted as safe and solid. The name comes from blue-colored chips in poker because the chips are rated as the most valuable.


2) Beta stocks

You can measure risk, called beta, by determining the volatility in its price. Beta values can be positive or negative. The sign simply indicates if the stock is going to move in sync with the market or it will go against the market.

What really is important is the absolute value of beta. Higher the beta, the higher the volatility and the more the risk. A beta value over 1 indicates the stock is more volatile than the market. High beta stocks are riskier. Yet, a smart investor can use this to make greater profits.

Stocks can be classified on the of price trends

Prices of stocks regularly run in pair with company earnings. 

So we can classify stocks into two groups: cyclical stocks and defensive stocks

How to use this

You can use stock divisions as effective sorting and identification tools. You can analyze stocks within a sector, along with other analyses.

Analyzing stocks by sector can be exceptionally valuable. This will help you to compare how your stock is acting related to others in the same sector.

For example, analyzing the sector you may find that the majority of stocks increased by 10% but your stock dropped by 5%. 

You would like to discover what made this exception.

Quiz yourself about How are stocks classified and why in the following quiz:


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