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Stocks can be categorized in a number of ways.
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Stock Defined by Type
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There are two main types of stocks: Common stock and Preferred stock.
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Common Stock
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When people talk about stocks they are usually referring to this type. In fact,
the majority of stock is issued is in this form. We basically went over features
of common stock in the last section. Common shares represent ownership in a company
and a claim (dividends) on a portion of profits. Investors get one vote per share
to elect the board members, who oversee the major decisions made by management.
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Over the long term, common stock, by means of capital growth, yields higher returns
than almost every other investment. This higher return comes at a cost since common
stocks entail the most risk. If a company goes bankrupt and liquidates, the common
shareholders will not receive money until the creditors, bondholders and preferred
shareholders are paid.
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Preferred Stock
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Preferred stock represents some degree of ownership in a company but usually doesn't
come with the same voting rights. (This may vary depending on the company.) With
preferred shares, investors are usually guaranteed a fixed dividend forever. This
is different than common stock, which has variable dividends that are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are
paid off before the common shareholder (but still after debt holders). Preferred
stock may also be callable, meaning that the company has the option to purchase
the shares from shareholders at anytime for any reason (usually for a premium).
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Some people consider preferred stock to be more like debt than equity. A good way
to think of these kinds of shares is to see them as being in between bonds and common
shares.
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Stock Defined By Group
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The scrips traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F'
and 'Z' groups. The 'A' group shares represent those, which are in the carry forward
system. The 'F' group represents the debt market (fixed income securities) segment.
The 'Z' group scrips are the blacklisted companies. The 'C' group covers the odd
lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations.
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Stock Categories by Market CAP
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If all the outstanding stock of a company is multiplied by the market price of each
stock (Outstanding Shares * Market Price) you will get the Market Value of the company,
also called as Market Cap. A large size company usually carries a low risk-return
ratio than a small size company. Following are the three categories that market
uses to categorize publicly traded companies:
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Large Cap: A company with the market capitalization of 1000 cr or above.
Large Cap companies are generally considered low risk low return because generally
their earnings as well as assets grow slow and steady. They are also usually overvalued
because of there stability.
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Medium Cap: A company with the market capitalization of 100–1000 cr. Medium
Cap companies are generally considered medium risk and medium return because they
are in their growth stage facing heavy competition in addition to other market forces
like supply, demand, economy, interest rate etc.
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Small Cap: A company with the market capitalization of 100 cr or less. Small
companies are considered high risk-high return due to the upside potential they
carry and downside risks that comes with it. Also, their stock is traded less often
that medium and large cap creating a liquidity issue
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