A stock is an investment you make into a public company. In the share market, when a company sells its stock to the public, they are typically issued under two types: common stock or preferred stock. In addition, stocks in the Indian stock market are further divided into specific categories such as the size of the company, sector, area and company style.
Common stock and preferred stock
As an owner of common stock, you stand to receive a portion of the company’s profitability as well as have a right to vote. You can also earn dividends; however, dividends as a common stockholder could be variable and not guaranteed.
Preferred stock is generally likened to bonds. It offers preferred stock holding investors a fixed dividend and provides them with preferential treatment. Moreover, preferred shareholders receive guaranteed dividends.
Prices of preferred stocks are typically less volatile than common stock prices. This means that preferred stock shares may not lose value, but at the same time, they could also be less prone to gaining value. In short, if you are looking to prioritise your income over the long-term, it can be a good idea to go in for preferred stocks.
Here are some pros and cons between common stock and preferred stock.
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COMMON STOCK
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PREFERRED STOCK
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PROS
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Could offer higher long-term returns; Has voting rights.
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Fixed, high and guaranteed dividends; Less volatility in share prices; Shareholders could recover some portion of investment in the event of a liquidation.
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CONS
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May or may not receive dividends that could be lower, inconsistent and unassured; Possible high volatility in stock price and dividends; High likelihood of losing investment in the event of bankruptcy or liquidation.
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Slow and lengthy long-term growth potential; Typically, does not provide voting rights. |
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CAN BE USED TO |
Create wealth in the long run | Generate income for investors |
Other types of stocks
Within the broad category of common and preferred stock, stocks are further divided under separate categories. Here are leading ones:
- Large-cap, mid-cap and small-cap: Stocks segregated on company size is based on market capitalisation or the company’s value. Companies are typically divided into three bucket sizes. These are large-cap, which and small-cap.
- Sector: Companies are further divided by industry, also known as sector. For instance, technology or energy sectors have stocks in the industry they belong to and could move in a particular direction based on market or economic situations. This is why it is crucial to diversify your portfolio by investing in stocks across industries.
- Area: Company stocks are also grouped according to geographic area or location. For instance, you can invest in companies in India that operate in the United States and even in companies that are based abroad and across emerging markets. For example, international stocks that are set to expand are regarded as an excellent idea for investment.
- Style: Stocks are also described based on growth or value. For instance, companies that are anticipated to proliferate or are snowballing are referred to as growth stocks. A large number of investors pay additional cost for such shares because they expect more substantial returns. On the other hand, value stocks are stocks that are typically underpriced or underestimated. A particular section of investors believe that balance stocks could increase in price, either because they have yet to grow or could be experiencing a short-term downfall.
Knowing the right stocks to invest
A crucial consideration when deciding to invest in stocks may not necessarily mean the category in which it lies, but the company’s growth potential in the long run and if it complements other investments in your portfolio.
If you are not looking at gathering individual stocks into a diversified portfolio, you can consider stock index funds. Experts recommend that index funds could be the easiest way of building a diversified portfolio. These funds can allow you to buy many stocks within a given transaction, i.e., they follow a section of the market – for instance, large-cap stocks – by tracking a benchmark index such as the Nifty 50.
Bottom line
To invest in the stock market, you need a Demat and trading account from highly rated brokers that offer you the ability to purchase individual stocks and index funds.
