• HDFC securities
• 05 Jan 2023
• Knowledge Centre

Investing in the share market is popular among investors eying decent returns in the long run with little risk. equity shares represent a unit of ownership in the company and the investors buying equity shares become part owners of the company equivalent to shares held by them. It is essential to understand what these shares and stocks are and the types of shares.

What are shares?

Types of shares

A share represents an ownership stake in the company. The majority of the shareholders are known to hold common stock while some hold preference shares. Preference shares give the shareholders preference over common shareholders, especially during the winding up of the business. Additionally, shares can be classified on the basis of:

Capitalization

Stocks can be classified based on their market capitalization or size. Primarily, there are 3 types in this category. Large-cap, Mid-cap and Small-cap.

Investment approach

Two of the most common approaches to investment are growth and value investing. Growth stocks have the potential for high rewards but carry higher risks as well. On the other hand, value stocks offer a safer approach by investing in already established companies.

Location

Depending on the location of the company shares can be domestic or international. Shares of a company that is not located in the country are known as international shares.

Dividend

Divided refers to a portion of the profits of the business that is given to the shareholders. Stocks that offer regular dividend payments are known as dividend stocks while non-dividend stocks do not make dividend payments to shareholders.

Economic cycle

Stocks can be classified in regard to the economic cycle of growth and expansion. Stocks that benefit from growth cycles in the economy are known as cyclical stocks whereas stocks that aren’t much affected by the economic cycles are known as defensive or non-cyclical stocks.

Blue-chip stocks

Certain stocks are classified as blue-chip stocks as these stocks mainly belong to industry leaders and well-reputed companies. Investors have strong faith in these companies and consider them to be safe and stable investments.

Penny stocks

Unlike blue-chip stocks, penny stocks are mainly stocks of companies that are considered to be risky or financially unsound. As the name suggests, the price of these shares is relatively low, around Rs 10 or even below.

IPO stocks

Initial Public Offering (IPO) is a process in which a private company goes public by offering its shares to the general public in the primary market for the first time to raise funds. Once the IPO process is complete, the stock is allotted to the investors who have subscribed to the IPO. Subsequently, the shares are listed on the stock exchange and traded in the secondary markets. The newly listed shares are referred to as IPO stocks.

Investing in shares for the long term can provide better returns by diversifying your portfolio and minimising risks. It is always advisable to allocate your investment money to different types of sectors and asset classes in the market.