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What Are The 4 Types Of Stocks?

17 Mar, 2022

What Are The 4 Types Of Stocks?

Stocks are categorized as per their style in many ways. The main type of stocks are common stocks and preferred stocks. If you are considering stock trading or new to the word of trading read on, as this blog will help you strengthen your basic understanding of stocks too.

What are stocks?

A stock is an investment in a company that is public. When you own a stock, you become a shareholder who owns a part or rather a fraction of that public company. A stock is also called an equity or a share.

Investors buy or sell stock in the intention that it will increase in value. Also, the more the investors the more the value of the company increases, thus letting its investors profit from their equities in the company. Why do people invest? For inventors - stocks are a way of beating inflation. While for companies - stocks are a way of raising money to help the company grow or expand.

In this blog we have categorized types of stocks into 4 categories for easy understanding:

1. Growth Stocks:

Growth stocks are issued by public companies that have demonstrated or displayed a good past record. They are growing, developing and performing well in the industry. Therefore growth stocks seem very favorable to invest in, but you should know that there is always a risk that comes with it because of its developing nature.

2. Yield Stocks:

Yield stocks also known as dividends are profits made by the company to the shareholders who have invested in the same company. Not all stocks pay dividends. If you want to earn dividends you have to specifically choose to invest in dividend stocks. The dividend amount is paid to the shareholders in the form of cash or sometimes, even more stocks. This decision is taken by the company’s board of directors.

3. New Stocks:

New stocks are also known as IPOs. Before you invest in IPOs you should be aware of the benefits and the risks of the same. What is an IPO? An IPO is an Initial Public Offering. An IPO is like a launch party for when a private company becomes a public one. These companies lack a proven track record which makes it risky to invest in them, however IPOs do have the potential to offer long term gains.

4. Defensive Stocks:

Defensive stocks are those that will always continue to provide returns, due to the nature of the company's products that are constantly in demand. These stocks are always in demand irrespective of economic conditions as the sales of such products remain unaffected by market swings. Having a diverse portfolio with defensive stocks really helps at the time of a recession. Defensive stocks will always give you stable returns.

Benefits of investing in stocks:

Apart from dividends, there are many benefits of entering the world of stock trading. For starters you should know that shareholders have a claim on the assets of a company in case the company they have invested in has dissolved. But only after all debts are cleared. Another interesting benefit or rather 'power' that shareholders have is the eligibility to vote in case there is a mismanagement issue in the company. But while shareholders are so well connected with the company there are also limits placed for good. In case the company faces bankruptcy, the shareholders are not liable for any losses.

Also Read, 4 Reasons you must start investing in stock market today

Risks of investing in stocks:

Now along with the benefits the risks are apparent. The first and most important risk is that there is no guarantee about how a company will fare in the marketplace. It could be a case of either a bull or a bear market, at any time. Incase of liquidation, shareholders are only paid what is left of the assets as creditors are paid off first. Even though shareholders have a right to vote, the benefit is only limited to this much, as the decision of the company management is finally taken up by the biggest shareholder of the company.

If you are interested in trading and if you think you might want to dive into it at some point in your life, make sure you open an account in advance so that you don't miss out on these interesting opportunities whenever they come your way! Otherwise, stay tuned for our next blog on Sharepa Best Discount Broker in India.

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