Types of stocks
Everyone wants to create wealth. Stock market is a great place for long term wealth creation .Though stocks are risky, they can offer lucrative returns if decisions of investments are made with reasonable care. Understanding the basics of stock investments such as what are the different types of stocks, how to choose them, etc. can help you manage risk and succeed in stock market investing.
Stocks are classified on various criteria. Let’s take a look at some common types of stocks along with tips to choose them.
Based on ownership rights
✓ Common stocks: Such stocks come with voting rights. However, common stocks are the lowest in priority in the event of company’s liquidation. Therefore, common stockholders do not get their money back until the preferred stockholders and bondholders get their respective shares. However, common stocks usually perform better than preferred stocks and bonds and so there is a possible upswing in the longer run.
✓ Preferred stocks: These stocks pay regular dividends to the investors, which is either fixed or set against a benchmark performance. They are also less volatile than common stocks.
Tips to choose: Common stocks are easier to trade on the stock exchange. Also, preferred stocks are offered under private placement where retail investors can hardly participate. Since large corporates buy preferred stocks, it is a common way to raise money. Some companies also offer convertible preferred stocks that can be exchanged with common stocks after a point of time. So, even though preferred stock is equity, it works a lot like bonds and can behave like debt from a tax angle.
Based on market capitalization
✓ Large-cap stocks: These are stocks of well-established companies with a large market capitalization. These companies usually have a valuation of Rs 10,000 crore or more.
The large cap or blue-chip stocks, as they are commonly known as, are of large financially sound companies with a steady growth rate. However, they generally do not provide tremendous growth in a short span of time. They usually provide steady growth in the longer run. Some common examples of blue-chip stocks in India are SBI, Bharti Airtel, HDFC Bank, TCS, Infosys, Wipro, ONGC, ITC, Maruti Suzuki, Kotak Mahindra Bank, etc.
✓ Mid-cap stocks: These are stocks of companies that have a market capitalization of Rs 500 crore to 10,000 crore. These stocks are however more volatile than large cap stocks and are preferred by intraday traders than long-term investors. Some examples of mid-cap stocks would be Bata India, Colgate-Palmolive, Emami Ltd., Berger Paints, Canara Bank, Godrej Industries, etc.
✓ Small-cap stocks: These are stocks of companies that have a market capitalization of less than Rs 500 crore. These are highly risky in nature. Foretelling the fortunes of these stocks is notoriously difficult as the price movements can be volatile. These stocks are usually preferred by intraday traders who use technical analysis to pick the right stocks. They do so in the hope of making a quick buck over a single day. Some popular small cap stocks are Pfizer Ltd., Spice Jet Limited, L&T Technology Services Ltd., Fortis Healthcare, etc.
Tips to choose: You need to know which stocks would work best for you. If you are looking for a steady portfolio which does not need to be actively managed, then you can opt for large-cap stocks. If you want high growth along with some stability in the portfolio, then mid-cap stocks are a good buy. And if you are an aggressive investor with sufficient market knowledge, small-cap funds would be a good bet, provided you have done the basic groundwork on the company and the management before investing!
Based on price trends
✓ Defensive stocks: Such company stocks are unaffected by market conditions. For example, stocks of pharma companies, insurance, tobacco, food and beverage companies etc. perform moderately in all market scenarios.
✓ Cyclical stocks: Such stocks get affected more by market cycles and trends and have a particular cycle of operation. For example, stocks of travel companies, automobiles, airlines and hotels etc. are cyclical in nature.
Tips to choose: Defensive stocks are preferable during tough market conditions and cyclical stocks can be an option during a booming market. Cyclical stocks are more market sensitive and choosing them at the right time of the cycle is more important.
Based on investing style
✓ Value stocks: These stocks have some potential but are undervalued compared to their peers. The stock could be underpriced due to multiple reasons like change in management, cyclical, financial distress, investor sentiments, etc.
✓ Growth stocks: Such stocks are in the midst of a growth phase. Price of such shares rise faster as companies ideally reinvest their earnings instead of distributing dividend.
✓ Income stocks: Usually these are the stocks of stable companies who distribute higher dividend and thus provide some stability to the investors.
Tips to choose: ‘Buy low, sell high’ is the common philosophy followed for value stock.
Growth stocks are best for aggressive investors who are primarily looking for capital gains.
Income stocks are relatively less risky can be a secondary source of income. However, these stock prices may witness a huge fall during market downturn.
To conclude, it’s important to choose the stock that fits your investment profile. There are lots of factors that need to be considered like market conditions, company fundamentals, tax implications, volatility, etc. that goes into the process of stock picking. Knowing the basics can help you make the right and informed choice. You can also seek help of financial advisers with regard to strategies, individual stock selection and key investment decisions.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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Investing 2.0 Where to Invest: How to select investments
Investing may not be rocket science, but it does require basic understanding. First and foremost, it is important to understand yourself as an investor, before selecting the right investment options. A portfolio that is just right for you may not work for someone else. This is because each individual has a different attitude towards risk. Further, each individual has a different set of financial goals depending on which stage you are in in your life. Thus, while it is correct to state that everyone has a different investment selection philosophy, the ground rules for sound investment selection remain the same. They are: Understand your risk tolerance This is the first and foremost step of investment. Know yourself, your risk appetite before taking the next step. Identify your financial goals Different life stages demand different life goals. For instance, if you are just beginning your investment journey, you may have a short-term plan of going on a family vacation. Your medium-term goal may be to buy your first home a few years down the line. Finally, you may also want to save for your retirement that is 30 years away. This can be classified as a long-term goal. For each of these goals, you need to plan differently and may have to invest in different financial products to meet each of these goals. This process of selecting various investment options based on your financial goals is called asset allocation.Diversification is the key to successWhile investing, you do not want to put all your eggs in one basket. The key to success is to diversify. But diversification too, has to be according to your risk appetite. You may thus wish to diversify among different asset classes such as equity, debt, real estate and commodities. This is called vertical diversification.You can also diversify within the same asset class. This is called horizontal diversification. For instance, if you are investing in equity mutual funds, you may want to invest in a combination of large cap and mid cap funds to spread your risks. Similarly, if you are investing in debt funds, you can choose fund with varying durations. The duration of the fund, determines the level of risk in a debt fund. Avoid what you don’t understandDo not go overboard in your effort to diversify. At all cost, stay away from financial products that you do not fully understand or know the specific risks they entail. Consider high risk or complicated products only when you have the raequisite knowledge. Keep monitoring your investment statusOnce your portfolio construction is complete, you need to keep a watch over it to ensure your investments are meeting your financial goals. It is always best to review your portfolio at least once a year. However, don’t keep a tab on your investments on a daily basis. That’s because you may be tempted to act every time markets move unexpectedly. Such decisions may work over a short period but may not help you meet your long-term financial goals. Remember that volatility is part and parcel of the market movement, and you have to accept this fact if you are a long-term investor.The bottom line is that there is no one “right” way to select investments. But so long as you are focused on your financial goals, these ground rules should hold good under any circumstances. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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Myths about investing in stocks
Some people always feel that stock investing is more like gambling. But that is far from reality. Stock investing involves a lot of research, understanding of the market and foresight. It may seem seem like a gamble but it is a highly calculated and a calibrated one.There are many other such misconceptions about the myths about investing in stocks that have stuck around in the minds of public for years. This article will trawl through the list of stock market myths and bust them so that your investment decisions are not swayed by misinformation. Here is a quick and helpful guide to help you know how to start investing in stocks.Myth 1. Investing in the stock market needs a lot of moneyReality: Most people are of the opinion that investing in the stock market is only for the experienced and the rich. However, contrary to popular belief, stock investing can be done with as low as Rs 10. Technically NSE, BSE, etc. do not have any minimum amount for investing. To know how to start investing in stocks, you don’t need to be wealthy. You can start investing money in stocks by putting into equity investments with a small capital and then reinvesting your earnings. However, it is important that you ensure you are investing in good businesses at a fair price along with a long-term perspective.Myth 2. Stock investment helps you make money quicklyReality: Though many people earn via intraday trading, there is no such thing as ‘overnight money’ schemes in the stock market. Equity investments are considered to be ideal for long-term investors. Therefore, keeping your expectations realistic is more important while trading in stock market.Myth 3. Investing in stocks is all about timing the marketReality: Timing the market is not an ideal way of investing. Trying to catch crests and troughs of a stock cycle can be quite challenging and, more often than not, you would end up losing more money out of sheer fear. By timing the market, you are letting fear and greed rule your judgement, which is contrary to the basic stock investing principle. Instead of trying to “time” the market, it makes more sense to focus on your investment goals. Being invested is more important. Myth 4. It’s always good to buy ‘hot stocks’Reality: This is not always true. Hot stocks may not generate enormous gains over the long run. It’s better to analyse the stocks based on the company’s fundamentals and intrinsic share value.Stocks that are undervalued or value stocks have often outperformed popular growth stocks at many times. Myth 5. ‘Buy low and sell high’ is always the right strategy for investing in stocksReality: Beginners to equity investment think that ‘buy low and sell high’ is the key to investing. But, price alone is not the factor for stock selection. It is important to study the businesses that you are investing in. Having busted stock market myths about investing, you can now know when to buy and when to sell, which is a critical factor that is more important than the price.To sum up, avoid being influenced by stock market myths about investing and invest rationally keeping in mind your individual goals and risk tolerance. You can also consult professionals and seek their advice to optimize your investment decisions. If you are a novice in the world of stock market investing, it is a good idea to consult expert opinion and advice through a financial expert who can guide you through the process and familiarize you with trading. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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