Types of Stocks: Growth, Value, Income & Market Cap

Stocks are categorized into various types based on different characteristics, such as growth potential, value, income generation, and market capitalization. Understanding these classifications is essential for investors looking to build a diversified portfolio that aligns with their investment goals and risk tolerance. By exploring the distinctions between growth, value, income, and market capitalization stocks, investors can make informed decisions on how to strategically allocate their investment capital and optimize their returns in the dynamic stock market environment. In this discussion, we will delve into the nuances of different types of stocks and the implications of investing in each category.

Let’s evaluate different stock classifications that are commonly used:

Types of Stocks on the Basis of Market Capitalization

Stocks are often classified as large caps, mid caps, small caps, and micro caps based on their total market capitalization (Current Share Price x Total Number of Shares). Though there are no exact cutoffs about what exactly defines a large-cap, investors usually categorize companies as follows:

Large-Cap Stocks

These are companies with a market capitalization exceeding Rs 10,000 Crore, representing well-established and stable businesses with lower risk compared to smaller companies.

Mid-Cap Stocks

Companies with a market capitalization ranging between Rs 2,000 Cr and Rs 10,000 Cr. These stocks offer a balance between growth potential and risk, typically exhibiting moderate volatility.

Small-Cap Stocks

With a market capitalization between Rs 200 Cr and Rs 2,000 Cr, small-cap stocks represent smaller companies with higher growth potential but also higher risk due to their size and market presence.

Micro-Cap Stocks

Stocks with a market capitalization below Rs 200 Cr, these companies are the smallest in terms of size and market value, often considered high-risk investments with the potential for significant growth but also higher volatility.

The concept of Risk and Return is applicable here too. Small companies are riskier than large ones. Due to this increased risk, many smaller companies tend to give higher returns than large or mid-cap companies. Of course, the proportion of small companies not doing well is also higher than those of their larger counterparts.

Many large-cap stocks are high-quality, well-established companies with stable or growing earnings. The stocks of these companies are known as blue-chip stocks. The perceived risk associated with these companies is very low. Examples include many stocks that are part of the Sensex or Nifty 50 index.

Types of Stocks on the Basis of Growth, Value, and Income

This classification of stocks depends on the nature of the business, its profit distribution policy, and the general assessment of price versus actual intrinsic value.

Growth Stocks

These are stocks of businesses growing at a higher-than-average rate. This high growth translates into higher profits, reflected in the rising stock prices. Because of this, these companies prefer to reinvest their earnings back into operations to generate more profits. This theoretically helps these companies grow faster. Consequently, these companies have low dividend payouts. Generally, growth stocks are bought more for capital appreciation in stock prices and are riskier than the other two varieties.

Value Stocks

These are stocks that, according to some financial analysis ratios, are trading at prices lower than their actual (intrinsic) values. Some commonly used ratios to assess the reasonability of price against embedded value are:

• Low P/E ratio
• Low P/BV ratio
• Low Price-to-Sales ratio

Value stocks don’t remain good value picks forever. When other investors realize that the stocks are underpriced, the prices tend to rise and reward early investors who bought at lower levels.

Income Stocks

These stocks distribute a comparatively higher percentage of their earnings as dividends to shareholders. This often gives them high dividend yields (dividends in relation to their share price). At times, these are also referred to as high dividend-yield stocks. A higher dividend means higher income and hence, the name income stocks. Generally, these belong to companies with stable businesses churning out reasonably assured profits.

Conclusion

In conclusion, the classification of stocks into categories based on growth, value, income, and market capitalization provides investors with valuable insights into the diverse opportunities available in the stock market. By incorporating a mix of growth stocks for potential capital appreciation, value stocks for undervalued opportunities, income stocks for consistent dividends, and a range of market capitalizations for diversification, investors can build a well-rounded portfolio that balances risk and return. It is essential for investors to conduct thorough research, consider their investment objectives, and maintain a disciplined approach to stock selection within each category to optimize their long-term investment success in the dynamic and ever-evolving stock market landscape.

Also, learn how to select stocks for intraday trading with this advice for beginners. Discover the fundamental techniques, approaches, and standards for making wise trading choices.