Types of Stocks or Shares : Market Capitalisation, Ownership, Volatility and More 2024 Edition

Last updated on August 23rd, 2024 at 12:27 am

Stocks also known as shares represent ownership in a company. When you buy a stock, you own a small part of that company.

Know More about Stocks: What are stocks ? Benefits, Dilution and more 2024 Edition

Here’s a list of Different types of stocks to invest in the financial market.

According to Market capitalisation



Market Capitalisation : A way to measure the size of a company .

For example if a company has 1 million shares and each share is worth $50 then the market cap would be $50 million.

Large-cap Stocks:

• Shares in top 100 companies in terms of market capitalisation.

• These are well established companies with larger profits and stable performance.

• These companies usually have a market cap of $10 billion or more.

• For example : Apple , coca-cola , Microsoft etc.

Mid-cap Stocks

• Shares in top 101 to 250 companies as per market capitalisation.

• Mid-cap companies have market capitalisations between $2 billion and $10 billion.

• Adapt quickly to changes in the market.

• Mix of growth potential and moderate risk

• They can potentially offer higher returns.

• Provide diversification.

Small-cap Stocks

• Small-cap stocks refer to shares of all the remaining companies with a small market capitalisation.

• Market capitalisations between $300 million and $2 billion.

• Higher Risk to Reward Ratio : These companies offer higher growth potential but Investors need to be prepared for higher volatility and the possibility of losses.

According to Ownership

Stocks based on Ownership has two primary types are common stocks and preferred stocks both are different in terms of their rights and privileges:

Hybrid Stocks

• Also known as convertible preferred stocks.

• Contains combine features of both common stocks and preferred stocks.

• Benefits of fixed dividends like preferred stocks while also offering the potential for capital gains like common stocks.

• Typically No or Limited voting rights

• Offer fixed dividend payments.

• Can be converted to common stock.

• Moderate risk level due to fixed dividends and conversion option.

• The most common type is the convertible bond which allows investors to convert their bonds into equity or debt.

Stocks With Embedded Derivative Options

Stocks that have additional financial features allowing certain actions, such as conversion, option to buy/sell, or other complex financial structures.

Embedded derivatives are financial instruments that are part of another security (like a bond, stock, or loan) but can be separated and valued on their own.

Common Types of Stocks with Embedded Derivative Options

• Convertible Preferred Shares: These are preferred shares that can be converted into a specified number of common shares.

• Convertible Bonds: Allows the bond to be exchanged for stock.

• Callable Preferred Shares: Allows the company to repurchase the shares.

• Putable Stocks: Allows the shareholder to sell the shares back to the company.

• Warrants: Give the holder the right to buy the company’s stock at a specific price before expiration.

According to Fundamentals

Stocks can be categorised based on various fundamental characteristics such as growth potential, value, income, market capitalisation, and sector.

Overvalued Stocks

Stock current price is not justified by its earnings outlook or growth potential.

• High Price-to-Earnings (P/E) Ratio.

• The dividend yield is lower compared to similar companies, as the stock price is higher.

• The stock price is driven up by excessive market enthusiasm or speculative buying rather than fundamental performance.

• Future earnings projections are not aligned with the current high stock price.

Why Stocks Become Overvalued ?

Positive market sentiment or speculative trading can drive up the price.

Temporary factors, such as news, trends, or fads, can inflate stock prices.

Overoptimistic expectations about a company’s future growth.

For Example, Dot-Com sky-high valuations without corresponding earnings leading to the bubble burst in 2000.

Housing stocks and related financial instruments were overvalued before the 2008 financial crisis.

Undervalued Stocks

These stocks are considered to be trading below their true worth and offer potential for price appreciation.

• Low Price-to-Earnings (P/E) Ratio.

• The dividend yield is higher compared to similar companies, indicating a lower stock price.

• The company has strong financials, good earnings growth, and robust business prospects.

• The market has not yet recognised the company’s potential or has overreacted to negative news.

Why Stocks Become Undervalued ?

Negative market sentiment or lack of awareness can keep the stock price low.

Short-term problems or bad news may have depressed the stock price, despite solid long-term prospects.

Stocks in a sector that is currently out of favour with investors.

How to Identify Overvalued and Undervalued Stocks ?

Compare the Price-to-Earnings (P/E) Ratio with the industry average and historical averages.

A lower Price-to-Book (P/B) Ratio may indicate an undervalued stock, while a higher ratio may indicate overvaluation.

Compare the dividend yield with similar companies in the sector.

Estimate the present value of expected future cash flows to determine intrinsic value.

According to Price Volatility

Refers to how much a stock’s price fluctuates over a specific period.

High-Volatility Stocks

• High-volatility stocks experience significant price swings within short periods.

• Large fluctuations in stock price.

• High beta coefficient (a measure of volatility relative to the market).

• Greater risk and potential for higher returns.

Low-Volatility Stocks

• Low-volatility stocks have relatively stable prices with minimal fluctuations.

• Smaller price swings and more predictable price movements.

• Low beta coefficient.

• Lower risk but typically lower potential returns compared to high-volatility stocks.

According to Profit Sharing 

Refer to Shares of companies that allow shareholders to benefit from a company’s profits beyond regular dividends.

These stocks are typically associated with special profit-sharing plans or agreements where shareholders receive additional compensation based on the company’s financial performance.

Income Stocks

Income stocks are shares in companies that provide consistent and reliable dividend payments.

• Stable and predictable income streams.

• High dividend yields.

• Lower growth potential.

Growth Stocks

Growth stocks represent companies expected to grow earnings at an above-average rate compared to other companies.

• Can have high volatility due to fluctuating growth expectations and market sentiment.

• High potential for large price movements based on earnings reports and future growth prospects.

• Technology companies like Tesla, or newer companies in emerging sectors.

According to Economic trends

Refer to shares of companies that are influenced by, or take advantage of, broader economic trends and cycles.

These trends can impact stock performance based on various factors like economic growth, inflation, interest rates, consumer behaviour, and technological advancements.

Cyclic Stocks

Cyclical stocks are shares in companies whose performance is closely tied to the economic cycle.

• Shares are Highly volatile.

• Perform well during economic expansions and poorly during recessions.

• Sectors include consumer discretionary, automotive, and luxury goods.

Defensive Stocks

Defensive stocks are shares in companies that provide consistent dividends and stable earnings regardless of the state of the overall market.

• Lower volatility.

• Less affected by economic downturns.

• Provide essential goods or services (e.g., utilities, healthcare).

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