What is CMP in the Stock Market?
In previous times, the stock market was a physical space that traders set up offices and desks at, and stocks, shares and bonds were traded in physic…
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This article makes clear the varied forms of stocks available in the stock markets today.
Taking a Look at the Different Stock Types
The stock markets are more complex than you might originally imagine and are made up of a wide range of stocks that extend beyond publicly listed shares that are traded on a given stock exchange. As an investor it is pertinent to understand the varied kinds of stocks present and available in the market and understand the characteristics that make them each unique. This information can help you determine whether or not they’d make for a viable investment. Listed below are some of the different types of stocks that aim to remove any confusion you might have pertaining to them.
Common and Preferred Stock
Also called ordinary shares, holding common stock is akin to partial ownership of a given company. With this stock class, it is possible for investors to avail of the profits the company generates in the form of dividends which are paid by the company. Holders of common stock are responsible for electing the board of directors of a company and are entitled to vote on policies that impact the corporate running of the company. Liquidation events carried out by such companies provide holders of this stock class rights on company assets; however this is applicable only once payments have been made to preferred stock shareholders as well as other debt holders. The recipients of common stock ordinarily include company founders as well as employees.
Preferred stock on the flip side provides stockholders with dividend payments that are made with regularity and which are provided prior to dividends being issued to common stock shareholders. In case a company dissolves or goes bankrupt, preferred shareholders are the first type of shareholders to be repaid. This kind of stock is best suited to investors hoping to secure a passive stream of income. Voting rights are not provided to the holders of this stock.
A number of companies like Alphabet Inc. issue common as well as preferred stock. GOOGL serves as its Class A common stock whereas GOOG serves as its preferred Class C stock.
Growth Stocks versus Value Stocks
Equities anticipated to grow at a pace that exceeds the broader market are called growth stocks. Such stocks tend to overperform in instances of interest rates being low as well as during times of economic expansion. Take for instance technology stocks that have outperformed in recent times owing to a robust economy interspersed with access to cheap funding. Themed exchange-traded funds help investors keep tabs on such stock.
Value stocks on the other hand are those that trade at an amount that falls below what a company’s performance may indicate and often have a valuation that is attractive within the broader market. Common value stocks include those operating within the world of finance, healthcare and energy and they ordinarily outperform during instances of economic recovery owing to the fact that they provide reliable income streams.
Income Stocks
Such equities generate regular income as they divvy up a company’s excess cash or profits and issue dividends that exceed the market average. Such stocks ordinarily experience a less amount of volatility and lack the kind of capital appreciation that growth stocks experience. This very fact, however, makes them ideal for investors that have a low threshold for risk and who seek a regular income stream.
Blue-Chip Stocks
Stocks of well-established companies that feature a significant market capitalization are referred to as blue-chip stocks. Such companies tend to have a long history of creating reliable earnings and are likely to be leaders in the industry or sector within which they operate. During periods of uncertainty, it isn’t uncommon for conservative investors to top-weight their portfolio with such stocks. Examples of blue-chip stocks include but aren’t limited to Microsoft Corporation (MSFT) and McDonald’s Corporation (MCD).
Cyclical and Non-Cyclical Stocks
Cyclical stocks refer to those that are directly impacted by the performance of the economy and ordinarily follow economic cycles of expansion, peak, recession and recovery. Such stocks are ordinarily characterised by significant volatility and surpass other stocks in terms of their performance during instances of economic strength and when consumers have more disposable income on hand.
Non-cyclical stocks on the flip side function within “recession-proof” industries that are likely to perform fairly well regardless of the state of the economy. Such stocks tend to outperform their cyclical counterparts in instances of an economic downturn or slowdown as the demand for essential products and services is likely to remain consistent.
Defensive Stocks
These stocks are known to provide consistent returns in most stock market environments and economic conditions. Companies that issue such stock ordinarily sell essential goods and services that include utilities, healthcare and consumer staples. By investing in such stocks, the portfolios of investors can potentially be protected against major losses in instances of a bear market. Defensive stocks may also fall under the blue-chip, value, non-cyclical or income stock category.
IPO Stocks
This stock is issued when a company goes public via an initial public offering. IPO stocks are ordinarily issued at a discount prior to the company’s stock being listed on a stock exchange. Vesting schedules may be applicable to such stock in order to prevent investors from selling all their holdings once the stock begins to trade. Recently listed stocks are often called IPO stocks by market commentators.
Penny Stocks
Equity falling below a certain amount say INR 25 is classified as a penny stock and is considered speculative in nature. While a handful of penny stocks are traded on major exchanges, a majority of such stocks are traded over the counter.
ESG Stocks
ESG stocks or environmental, social and corporate governance stocks are those that wish to promote ideals about environmental protection, value social justice and believe in ethical management practices. To understand this stock better understand that a company that firmly believes in reducing its carbon emissions beyond industry targets would be classified as having ESG stocks.
Wrapping Up
Now that you have read this article you should be better acquainted with the variety of stocks that populate the stock markets. Always understand the risks tethered to each of these stocks prior to deciding to invest in them.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
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