The stock market is all about knowing the right place to put in and then just sitting back to be wealthy. But in this process of wealth creation we should know different types of stocks before investing, what we often forget is understanding the crux of this magic returns platform.
The stock platform has so diverse set of options that one might not be able to differentiate among the features. This article will empower you with all the broad options that you can add up to your portfolio list.
Small-cap stocks
Small-cap stocks are classified based on the company’s market capitalization which ranges from $300 million to $2billion. These companies are usually young and are mostly startups.
As such companies aim at extending current business opportunities to a wider customer base, stocks of these companies have high growth potential in future. The stocks can be risky and highly volatile as they are accompanied by startup failure risk.
Indian Energy Exchange is one of the consistently top-performing small-cap stocks on NSE with a market capitalization of 26,533.22Cr.
Mid-cap stocks
Mid-cap stocks are issued by companies whose market capitalisation lies in a bracket of $2 billion to $10 billion. Generally, mid-cap stocks prevent high-risk market shocks and are stable in some sense.
Companies in this category have their interests inclined towards profitable growth and innovation to widen their chances of gaining popularity. These stocks are recommended for portfolio diversification for the aversion of risk to a nominal level.
The top-performing mid-cap stocks this year were JK Cement Ltd. and Blue Dart Express Ltd. with 1-year returns standing at +75.33% and +68.10% respectively.
Large-cap stocks
Large-cap stocks often called “big cap” usually accommodate a big portion in stock markets due the to nature of stock impacts. These stocks generally follow an uptrend in the longer run.
The classification for large-cap stocks is based on market capitalisation greater than $10 billion. The issuer companies are reliable and have a high public image gaining stable profits almost every time in the long run.
Companies motive is observed as diversification and keeping shareholders happy with regular dividends. Any changes in the position of these companies highly affect the overall market trend.
The best bidder in this category is TATA Group due to its sustained revenues and largest capitalisation.
Blue-chip stocks
Blue-chip stocks refer to highly-priced stocks that are recorded to be the best performers. These stocks generally lie in market capitalisation in billions.
Companies associated with these stocks are historically profitable and have a track record of operational efficiency. Stocks are less risky and can withstand tough market conditions.
Examples of the top 3 blue-chip stocks are HDFC Bank in the finance sector, Infosys in IT and ITC in the consumer goods sector.
Multibagger stocks
The stocks with good fundamentals that gives returns several times higher than the initial investments are called multi-bagger stocks. They generally possess a higher revenue growth rate in the short-run span.
Usually, the stock price is undervalued and the company has a reasonable accommodative debt ratio. The nomenclature for stocks depends on multiples of returns that is a 2x returning stock is known as two-bagger stock and similarly for further returns.
Indiamart and Trent are two examples of multi-bagger stocks with 3-year returns as of 11th Dec 2021 are +459.91% and +196.15% respectively.
Magic formula stocks
Magic formula stocks are the one that performs in the ranking of magic formula. The magic formula is based on two parameters that return on capital and earnings yields from the stock.
The stocks are firstly ranked based on return on capital and then separately ranked based on earning yields. After that, a comparison is made in both rankings and a final list is contemplated by the investor for available best options to have maximum returns.
The magic formula stocks require patience and long term commitment. The top-ranking companies in the magic formula are TCS with a dividend yield of 1.04% with a ROCE of 48.90% and Infosys with a yield of 1.53% with a ROCE of 35.25%.
Wide moat stocks
Wide moat stocks represent companies that are market leaders in their forte areas. These stocks generally perform better than competitors during a low trend in markets due to their competitive advantage.
They have strong unique properties in comparison to their industry competitors. Cash on hand, name recognition, and a focus on one superior product are key signals that stock might have a wide moat and be worth investing in.
The best-suited example of wide-moat stock can be Asian paints as they are the market leader in the furnishing industry and are valued higher due to their high brand equity and strong distribution network compared to their competitors.
Value stocks
Value stocks are stocks that trade on prices relatively lower than their fundamentals. These stocks can be located with attributes such as high dividend yields, low P/E ratio with low D/E and low P/B ratio.
Generally, the stock price of value stocks is lower than the prices of companies in the same industry. The motive while trading in value stocks is that investors aim at capitalizing when markets are inefficient.
One such example of value stock can be Coal India with a dividend yield of 10.58% and a D/E of 0.08%.
Defensive stocks
These stocks are usually issued by well-established companies that perform well even under pressure. The demand for their products grows higher in the market.
The stock feature is that they tend to perform well in turbulent market conditions and provide consistent dividend yields. Defensive stocks are long term gainers and less risky.
Stocks of companies like Hindustan Uniliver and Dabur India are categorised as defensive stocks with dividend yields of 1.73% and 0.81% respectively. They are put under this category because of their exceptional performance in the market when COVID took a toll on the goods and the stock market in 2020 and 2021.
Momentum stocks
Momentum stocks are more of a technique of investing rather than an idealised category of stocks. The technique refers to buying the stocks whose price is following a quick uptrend and selling that stock when it reaches the peak for maximum gains.
The stocks that are traded have high trading volumes and are generally short term traded. The stocks are highly volatile and have a high risk of wrong timing. One early or one late move can make or break your gains.
Kilpest India can be a good example of momentum stocks that as of 11th Dec 2021 had a lower circuit at 353.60 and an upper circuit at 530.40.
Penny stocks
Penny stocks are the stocks that usually carries a market cap under 5,000Cr. These stocks are highly liquid and bear extensive returns. Penny stocks are minimal in cost and hence attract small capacity investors.
Based on market capitalisation these are often termed nano-cap,micro-cap and small-cap. Most of the time, they lie under the category of multi-baggers that we discussed above.
The top 3 penny stocks that made returns up to +1000% in a year are Equip Social Impact with 28,127% returns, Radhe developers with 3,298% and Jindal poly investment and finance with 2,469% returns.
Bottom line
The bottom line for you to wisely invest would require a lot of brainstorming over your investment goals and then looking for the perfect strategy that diversifies your portfolio with a range of stocks we discussed. To align your income goals with wealth creation it is important to acknowledge the options carefully and act right at the right time.
